Oil Risk, Dovish RBA Minutes

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Oil risk to secure 25bp at Fed

The oil-related sell-off following the weekend’s attack on Saudi Arabia facilities is already losing steam. On Sep 14th, coordinated attacks using drone technology were carried out on oil facilities in Saudi Arabia. Saudi output was initially estimated to drop 50% or approximately 5% of global oil supplies. While the threat of a military response lingers, news Japan & US will consider the coordinated release of oil reserves and limited actual impact on oil output (yet incoming news suggests experts becoming less optimistic about the recovery of oil supplies), has allowed crude prices to come off the top. Nevertheless, the overriding fact remains, that the impact on the already fragile global economy would be negative, increasing the likelihood of weaker demand in the mid-term. US- President Trump on Monday indicated that Iran was probably behind the attack. For the Fed higher oil prices are ill-timed. Fed fully priced for a 25bp cut. Adding Saudi-Iran tensions and related oil shock, on top of US-China trade issues and general geopolitical uncertainties indicate the Feds fading commitment to mid-cycle adjustment. With 75bp cumulative cuts priced into the Fed is unlikely to walk any expectations backward. With the Fed rate cut fully priced-in, equity markets are likely to react to other driver’s mainly news around US-China trade. U.S. Trade Representative’s office said on Monday Deputy-level U.S.-China trade talks are scheduled to start in Washington on Thursday. This story combined with Fed easing should keep risk appetite elevated despite tension from the middle-east.

Dovish Minutes weigh on AUD

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It seems to be a rather Dovish bias communicated by the Reserve Bank of Australia in its minutes of the meeting of 3 September 2019. Although it decided not to further reduce its Cash rate in September after easing already two times this year in June and July, it appears that the RBA move came unsurprisingly, as the RBA waits for the Fed tomorrow before moving its toes. Financial markets are now anticipating an additional rate cut by year-end of 0.25 percentage point, which is in line with expectations for the Fed. Following the announcement, the Aussie has been dragging down somewhat against G10 peers.

The RBA easing tone has not fundamentally changed from August Board Minutes, as it continues to favor further easing if required to support growth and achieve inflation target of 2% – 3%. While policy makers consider the US – China trade spat to remain a major drawdown to global growth, downside risks stay domestically due to stagnant wage growth and weak domestic consumption stimulus, despite PM Scott Morrison tax cut validated in July 2019. Ultimately, the question arises whether the housing market is not at risk in spite of household debt and mortgage approvals at historical high and multi-year high respectively, in addition to stalling wage growth. Accordingly, attention will now turn to Thursday’s release of August’s labor data and in particular the unemployment rate gauge that should be unchanged at 5.20%, a market that the RBA expects to remain robust looking forward.

In that respect, AUD/USD currently trading at 0.6835, a 7-day low, is likely to stay flat short-term, approaching 0.6830.

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