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On May 20, a hawkish rate cut by the Reserve Bank of Australia could boost AUD/USD, which held above 0.64 for the third week. The RBA should lower the cash rate target a second time by 25 bps to 3.85% and signal a pause at the next meeting on July 8, mirroring the February 18 meeting. The data-dependent RBA will likely be more cautious than in previous meetings.
First, Australia’s GDP growth improved to 1.3% YoY sa in 4Q24 following four quarters of slowdown. However, RBA Governor Michele Bullock will likely emphasize a cautious approach to how Trump’s erratic trade policy impacts global growth and inflation, leaning towards the Fed’s wait-and-see stance. The US-China tariff reset on May 12 brought much-needed relief to investors and businesses, until the 90-day pause ends in August.
Second, the Melbourne Institute’s inflation gauge may be front-running CPI inflation, coming in surprisingly firmer at 3.3% YoY in April vs. 2.8% in March, above the RBA’s target of 2-3%. The wage price index increased to 3.4% YoY in 1Q25 from 3.2% in 4Q24, but mainly in the public sector instead of the private sector.
Third, Australia’s labour market remained tight, with the unemployment rate around 3.9-4.1% over the past year. Notably, the relative resilience of the Australian economy drove migration from New Zealanders seeking stable jobs and higher wages, away from NZ’s recession with a four-year high jobless rate.
After reviewing the developments following Trump’s “Liberation Day” tariffs on April 2, AUD/USD is unlikely to repeat the 10% sell-off in 2018-2019. In Trump 2.0, the administration is seeking to expedite the process towards trade deals with the “priority countries” such as Australia through its “escalate to de-escalate” tariff policy and tariff pauses. This helps to explain the AUD’s quick rebound on the tariff pauses after its initial capitulation to 0.59 on Liberation Day.
Unlike his predecessor – Scott Morrison during Trump 1.0 – Prime Minister Anthony Albanese did not align strongly with the Trump administration against China. Albanese has been working to mend the strained ties with Beijing since taking office in 2022. Following the Labour Party’s decisive re-election on May 3 and Albanese’s disappointment over Trump’s unjustified tariffs on US allies, the government has committed to defending national interests while seeking to diversify trade relations by elevating economic partnerships with the EU, India, and Southeast Asia. Unlike Trump 1.0, China did not devalue the CNY when US tariffs increased to 145% before the truce. The tariff reset underscored China’s strengthened position in tackling trade tensions against the US.
Following Moody’s decision to axe the US’s final AAA debt rating on May 16, AUD – which retained all three AAA debt ratings with stable outlooks – is looking like a sounder proposition than the greenback. In the two elections that elected their leaders for a second term, Australian voters endorsed the Labour Party’s centrist policies and stable leadership amid global uncertainties, contrasting with Trump’s disruptive and erratic trade and “America First” agenda.
Quote of the Day
“A great man is hard on himself. A small man is hard on others.”
Confucius
May 19 in history
In 1828, US President John Quincy Adams signs the Tariff of 1828/Tariff of Abominations into law to protect industry in the North.
Topic
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