AUD Dips on China GDP | Weekly Update

AUD

The soft second quarter GDP report out of China had a disproportionately large bearish impact on the Aussie dollar last week, as is typical given the close economic ties between the two countries. Friday’s strong domestic labour report was not enough to trigger anything but a mild bounce in AUD, perhaps as this merely confirms suspicions that the RBA is highly unlikely to start cutting rates until at least 2025. While the unemployment rate unexpectedly ticked upwards, the 50.2k jobs added were more than double consensus and its fastest pace of job creation since February.

This Wednesday’s PMI data for July will be closely watched by market participants. Of even greater importance will be next week’s CPI data for Q2, which could be key in determining the tone of the RBA’s August communications.

USD

Mostly second-tier economic reports out of the US came out stronger than expected, notably industrial production, retail sales excluding autos and housing data, throwing some doubt on the narrative of a slowdown there. The main exception was weekly jobless claims, which continues its slow trend upward, albeit starting from very low levels.

Neither the data nor the political convulsions are having much effect on expectations for Fed policy, as traders expect one rate cut in September and are evenly split over the chance for one or two further cuts before year end. With the Republican candidate for president firmly in front, we think that GOP rhetoric for a dollar devaluation bears watching. In its absence, we see a Trump victory as a positive for the dollar.

NZD

The New Zealand dollar traded in line with its Australian counterpart last week, ending lower against every other G10 currency. A weak Q2 inflation report added to the downside, as this solidified market expectations for at least two RBNZ interest rate cuts by the end of the year. Annual inflation eased to just 3.3%, its lowest level since the second quarter of 2021, with the core rate also dropping below 3% for the first time in three years.

Markets see a first RBNZ rate cut in August as a coin-toss. At any rate, we expect the bank to deliver a dovish pivot, whereby it voices greater confidence on the inflation outlook and signals lower rates are on the way at subsequent meetings.

CNY

The Chinese yuan depreciated against the broadly stronger US dollar last week. Despite the low expectations, markets were still left underwhelmed by the results of the Third Plenum. There was a focus on tech innovation this time around. Improving the financial situation of local governments that have struggled in recent years was also emphasised. A number of new reforms were announced, albeit they appear to be of a calibrator nature, for the most part. It also remains to be seen how the pledges translate into tangible action.

Some sense of urgency, however, appears to be present, and today’s PBoC decision to lower the 7-day reverse repo rate adds to this argument. The rate was cut by 10bps to 1.7%, and shortly thereafter banks announced a same-size reduction in 1- and 5-year loan prime rates. Monetary policy, especially in today’s China, can only go so far, and investors are waiting for other announcements. Attention now turns to the Politburo meeting in late July, which could bring about further remedies.

JPY

Last week saw another rebound in the yen, following what appeared to be another round of FX intervention from Japanese authorities. While the Finance Ministry failed to comment on the move, as is typical, recent communications made clear to markets that intervention was likely. This appears to have put a floor under the yen, which is now trading back below the 157 level on the dollar.

All eyes will now turn to next week’s Bank of Japan policy announcement. We have been bracing for the possibility of another rate hike at this month’s meeting for a while, although markets are not so sure, with swaps only assigning around a 40% probability of another 10bp rate increase. Tokyo inflation (Friday) and unemployment data (next Tuesday) could be key in guiding the bank’s rate decision. Even in the event of a surprise hike, we would expect the BoJ to deliver a relatively dovish set of communications, which could limit any upside for JPY.