Looking at the USD's (UUP) (UDN) (USDU) performance against fellow G10 currencies in the past month, we can see that the strongest performers have been the safe-haven currencies - JPY (FXY) (JPYS) and CHF (FXF). The weakest performers have been the commodity currencies - AUD (FXA) (AUDS) and NZD (NZDS), which tend to lose ground during risk-off periods. In the past month, the JPY strengthened about 3.67% against the AUD.
No surprises there given that equity markets have taken a beating after US-China trade tensions rose a few notches higher (The S&P 500 (SPY) is about 4% lower compared to a month back). With investor concerns firmly trained back on China and indirectly the Asia Pacific region, antipodeans took the brunt of the selling.
USD Performance vs. G10 Currencies - Past 1 Month
Impending Rate Cut Pins Down Australian Dollar
Aside from US-China trade tensions, the AUD has been under pressure on rate cut talk from the Reserve Bank of Australia (RBA). RBA Governor Phillip Lowe said on May 21 that a lower cash rate would help support employment and inflation and that he would consider a rate cut in next month's monetary policy meeting.
Australia's cash rate now stands at 1.50% and has not changed since August 2016. A probable 25bps cut during the central bank's next meeting would bring the cash rate to 1.25%, an unprecedented low. Even during the 2008-2009 crisis, RBA's cash rate stood at around 3%.
AUD/USD Breaks 0.70 Handle
Following Phillip Lowe's dovish speech, the AUD/USD broke below the 0.70 handle. While the AUD has found relatively strong support between 0.68 and 0.69 previously in 2015, 2016, and earlier in 2019, US-China trade tensions coupled with a dovish RBA should continue to weigh on the AUD.
At the start of May, the Reserve Bank of New Zealand (RBNZ) also decided to cut interest rates by 25bps to 1.50%, a historic low, blaming tepid inflation, employment growth, and a murky near-term outlook given US-China trade tensions.
At the start of the year, the US Federal Reserve performed a complete reversal on its monetary policy for 2019 and said it would not raise rates at all for the rest of the year. This came after 4 rate hikes in 2018, with the markets initially expecting 2 more this year. It is worrying that the Fed was willing to give away its optionality to raise interest rates so early in the year.
Does the central bank know something of the global economy that the financial markets are not pricing in yet?
Since then, the RBA and RBNZ have followed the Fed's dovish stance. The European Central Bank's (ECB) initial plan to review their monetary policy this summer looks likely to be pushed back indefinitely. Global central banks are suddenly pushing for looser monetary policies, and this could be indicative of slowing global growth ahead.
Theresa May Throws in the Towel - Next Candidate will Likely Push for Quicker Brexit
Theresa May has been synonymous with Brexit failure, so much so that she has decided that she is part of the problem the UK faces currently. Following her inability to garner sufficient support within her Conservative Party and other parties for her Brexit proposals, she announced this week that she will step down officially on June 7.
Thus far, some names being thrown into the ring are ex-Foreign Minister Boris Johnson, current Foreign Minister Jeremy Hunt, Health Minister Matt Hancock, etc. What unites these candidates will probably be their singularity of purpose if elected - get Brexit done. They will likely learn from Theresa May's failure to complete the Brexit process, and a more single-mindedness approach towards Brexit might raise the probability of a hard Brexit.
GBP Under Pressure on Brexit Uncertainty
Brexit uncertainty has been weighing on the GBP (GBPS) (FXB). Since the UK voted for Brexit, the GBP has traded to lows of about 1.20. Going closer to Oct. 31, the new official date for Brexit, volatility surrounding the currency will definitely increase. With 5 months remaining, the UK still has to contend with finding a new Prime Minister, not to mention whether that will mean fresh negotiations with the EU. The EU has stated that the new PM would have to work with the proposal Theresa May has thus far agreed with the EU.
If GBP breaks below the 1.25 level against the USD, this could pave the way for the currency pair to re-test the 1.20 level.
Time is ticking...
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.