The Australian dollar started weakening against the US dollar yesterday after the Bureau of Statistics reported a huge current account deficit for the fourth quarter of 2018. The sharp increase in Australia’s net IIP (International Investment Position) liability also encouraged currency traders to open or increase their short position in the Antipodean currency.
Additionally, the meager growth in corporate earnings and wage growth, the weak housing market, and deterioration in the service sector also aid the Australian dollar’s downfall. From a high of 0.7110, the AUD/USD pair has declined to a low of 0.7070 in the past 24 hours.
Economic indicators ring alarm bells in Australia
The Australian Bureau of Statistics has stated that the country had a seasonally adjusted current account deficit of A$7.2 billion in 4Q18. However, the reported figures were better than economists’ expectations for a shortfall of A$9.1 billion. Australia ended with a deficit of A$10.70 billion in the previous quarter.
The goods and services recorded a surplus of A$1.241 billion in the fourth quarter, down A$781 million from A$2.022 billion in 3Q18. Likewise, net exports of gross GDP declined 0.2% in Q4 2018, compared with a 0.4% gain in Q3 2018. Analysts expected a decrease of 0.1% in the reported period.
The statistics department also reported that Australia’s net IIP liability increased A$36.5 billion to A$975.7 billion at 31st December 2018, from A$939.1 billion on September 30th, 2018.
In 4Q18, Australian enterprises reported only a small growth in profits and wages. Analysts suspect GDP (gross domestic product) grew by a paltry 0.4% in the December quarter, with a slowdown in housing and wages limiting consumption. The country is seen recording annual growth of only 2.6%, down from 2.8% in the previous year, missing the Reserve Bank of Australia’s estimate for a 3% growth.
Matt Barrie, an entrepreneur, shared his opinion about the issues faced by the Australian economy with the Australian Financial Review.
Barrie told the news edition “The global economy is troubled. It’s low growth everywhere. It’s questionable if we ever exited the GFC.”
He further said, “In Australia, every indicator is blinking red. It’s a house of cards. We’re highly dependent on China (we’re on par with the Congo for how reliant we are) and they are in a trade war. We have the housing market falling off a cliff, and this is happening from Vancouver to Auckland too.”
Barrie’s gloomy view is not unique. Former Coalition adviser John Adams believes that Australia is heading towards an “economic Armageddon.”
John Adams further said, “Across the world, evidence is mounting that the world is drenched in debt and that more and more people, companies and governments are struggling to service these debts given slowing economic growth.”
“The IMF rang the alarm bells last week when it stated that Australia faced significant macro-financial risks resulting from high property prices and household debt levels. These risks make Australia extremely vulnerable to a catastrophic economic crisis.”
Australia’s services sector, which accounts for roughly 80% of the economy, is looking weak in early 2019. The Australian Industry Group’s (Ai Group) Performance of Services Index (PSI) reported a print of 44.3 in February, up 0.2 points from the previous month’s reading. The index remains near the multi-year low recorded in January. A reading below 50 indicates contraction.
PSI measures changes in service sector activity from one month to the next. The index started deteriorating on a back to back basis in early 2016. The weak economic data is expected to keep the Aussie bearish in the short-term.
Technically, the AUD/USD pair is declining after facing heavy resistance at 0.7140 levels. The currency pair is also trading below its 50-day moving average, while the RSI indicator has a reading below 50. As a result, we are anticipating the currency pair to move down in the short-term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
