Global Headwinds Persist

13th of August, 2019

With the RBA flagging some of the keys risks to the economy lie outside our borders, events overnight cause concern for the outlook.

After last Fridays insight that the RBA sees many of the headwinds for the domestic economy being driven by economic shocks offshore, events overnight in Hong Kong and Argentina add further concerns for the outlook. Whilst many of these geopolitical events overseas aren’t of direct importance to the domestic economy, they all contribute to a picture of a more volatile global political environment.

Tensions remained high in Hong Kong with protests still ongoing against the Chinese Government and now entering their 4th month. There was a clear indication that the Chinese are not looking to back down, amassing troops on their side of the border.

Further offshore, The Argentinian Peso fell some 38% overnight on the back of a populist presidential challenger winning a key poll. Argentinian government bonds took a beating, with markets now pricing a 75% chance of default and the equity market was down 48% in USD terms. Whilst these events of themselves are not of direct concern, events of this nature do have implications for the AUD.

With the RBA outlining that one of, if not the key transmission mechanism for monetary policy being changes in our exchange rate, any event that weakens the ability of the RBA to influence the AUD is concerning. With rising political tensions it is easy to envision heighten volatility in global currency markets, a clear concern for the outlook.

For a deeper look into the RBA’s medium term outlook and implication for domestic monetary policy, the Curve Month Insight for August will be out at 2:30pm.

Matthew Dunshea

Client Relationship Manager