AUD Soars to Six-Month Peak | Weekly Update

AUD

AUD posted fresh gains against most major currencies again last week, edging towards its highest level in six months on the greenback. Not only are markets pushing back their expected timing for RBA rate cuts, but swaps now see a 50% chance of another hike by year-end. News out last week will have strengthened the case for higher rates, as both the June services PMI (51.2) and May retail sales (+0.6% MoM) comfortably beat estimates. With domestic demand seemingly holding up well, and inflation not coming down at the pace that the RBA would like to see, we see risks to the Aussie dollar as skewed to the upside, particularly relative to its New Zealand counterpart.

This week will be a quieter one in Australia, with consumer confidence data (Tuesday) and inflation expectations (Thursday) unlikely to rock the boat too much.

USD

It’s perhaps a little too soon for FX markets to start pricing in the increased likelihood of a Trump victory in November, so the hints of softening in US economic data are driving markets. The payroll report for June contained more hints of a slowdown, as unemployment ticked up to 4.1%, prior job creation data was revised down, and wage growth slowed.

The data is not yet conclusive but together with the expected slowdown in June inflation does seem to free the Federal Reserve to cut rates twice in 2024, starting in September. If so, we would expect the dollar to give up some of its 2024 gains before the end of the year.

NZD

The Reserve Bank of New Zealand look set to hold rates steady on Wednesday. Policymakers had previously indicated that they don’t expect to begin lowering rates until H2 2025, but this is completely at odds with markets, which are pricing in the first rate reduction in October. We think that the balance of data, including last week’s dire business confidence number, points to a much earlier start to easing than the RBNZ has outlined so far. It will be interesting to see whether the bank hints at such this week. We suspect that Wednesday’s meeting is probably too soon for any big shift in rhetoric, although any sign that the bank is increasingly concerned over the growth outlook could lead to some downside in the kiwi.

CNY

The Chinese yuan ended the week nearly unchanged against the US dollar. Domestic data disappointed, with Caixin composite PMI showing an even sharper drop than the corresponding NBS index released earlier. While still positive, activity in the services sector hit an 8-month low (51.2). Recent activity data suggests momentum in the Chinese economy might be weakening. This week, attention will be focused on inflation, with June report out on Wednesday. It will be followed by trade data, out Friday. Aside from the above, the countdown to the Third Plenum is on with this key gathering of political leadership scheduled to start next Monday. Investors have limited hopes, but any news will be closely watched and may impact Chinese markets early next week.

JPY

The yen seemingly cannot catch a break, with the Japanese currency sinking to fresh 38-year lows last week versus the broadly weaker dollar. Continued verbal intervention from Japanese authorities has so far been insufficient to allay the yen’s slide. Finance Minister Shunichi Suzuki has continued to warn markets in recent weeks that direct FX intervention could be on the way, although this has not been forthcoming thus far. Investors also remain doubtful as to whether the BoJ will hike rates at anything but a very gradual pace this year. Last week’s data has not made a rapid policy normalisation any more likely, with the Jibun Bank composite PMI crashing back below 50 in June (49.7) for the first time since November. Attention today will be on the latest wage data for May – key for BoJ policy.