December was a good month for risk assets and the AUD. The US and China finally agreed their much-awaited Phase 1 trade deal and importantly the month also included improvements in key global economic data releases. Against this fertile backdrop, it was mostly onwards and upwards for the AUD/USD. The pair recorded its monthly low of 0.6756 on December 2 and its monthly high of 0.7032 on the last trading hours of 2019. Early in the month, the RBA left the cash rate unchanged and although the Statement (and Minutes a few weeks later) showed an easing bias, the Bank also signalled a willingness to be patient. Later in the month, broad USD weakness was also a theme helping the AUD/USD end 2019 back above the 70c mark.

December began on a positive note with better-than-expected official Chinese PMI data released on November 30. A few days later, the AUD got some support from an unchanged RBA decision and a Statement that probably wasn’t as dovish as many had expected. The Bank retained an easing bias, however the Statement included a comment on the “long and variable” lags of monetary policy, suggesting the Board’s patient bias in assessing the impact of its recent 75bps of easing before considering adding any further stimulus.

Conflicting US-China trade headlines were also a source of volatility at the start of the month, but after some speculation that a deal was not going to be reached in 2019, the US-China Phase 1 trade deal was announced on December 12. The initial market reaction was mixed as details of the deal underwhelmed a market with high expectations. US tariff on around $150bn of Chinese imports scheduled to start on December 15 were suspended while the $120bn September tariffs were halved from 15% to 7.5%.

The other major event a day later was the UK election with Boris Johnson’s Conservative party wining a larger-than-expected majority. The surge in the GBP after the release of the exit polls spilled over into the AUD. A few days later, as investors eventually positively digested the implications of the US-China trade agreement, risk assets were boosted by stronger than expected China’s monthly activity data (industrial production, retail sales, fixed asset investment) helping many major equity indices print new record highs.

On the domestic front, November labour market data, released December 19 were stronger than expected. The unemployment rate ticked down to 5.2% and employment rose sharply by 40k. Against a backdrop of improved global risk appetite, Australia’s labour force report triggered a pullback in RBA rate cut expectations, helping the AUD/USD embarked onto a new uptrend later in the month.

In the last few days of 2019, the USD came under pressure amid month end rebalancing activity while abundant USD liquidity (courtesy of the Fed repo operations) weighed on short dated US yields. The softer USD environment helped the AUD/USD end 2019 at 0.7017, a level that had not been seen over the previous five months.

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