Is There a Common Denominator Between Australia & the US?

Last night, the Reserve Bank of Australia stopped short of another 50bps hike to its overnight cash rate. The RBA’s statement contained one nugget that helps explain its decision: “One source of uncertainty is the outlook for the global economy, which has deteriorated recently.”

While Australia is a different economy with different circumstances—like higher consumer debt loads and variable rate mortgages—there are some factors in common with the US, such as the Chinese Yuan, which has been depreciating fiercely recently.

For Australia, we can see the relationship between the CNY/USD and the Australia PMI Manufacturing. A weaker CNY weighs on economic activity down under and possibly the RBA was cognizant of the built-in continuing slowdown that the CNY will cause in the months to come. All else equal, the Australia Manufacturing PMI looks set to move into recession territory by the end of the year.

The other impact of a depreciating CNY is on inflation. In the chart below, I plot the CNY/USD alongside the Australia 10-Year Government Bond breakeven inflation. Given the move in the CNY/USD, it looks like inflation is set to plunge in Australia… without the need for an additional 50bps hike.