AUD
AUD once again outperformed its New Zealand peers last week, as the dovish RBNZ announcement emphasised the growing rate divergence between the two nations. Australian inflation has continued to surprise to the upside, and investors remain convinced that the Reserve Bank of Australia won’t even begin contemplating cuts until 2025.
All eyes this week will be on the June labour report, due out on Thursday. So far, the domestic jobs market has held up rather well, with positive job creation posted in four of the first five months of the year. Economists are expecting much of the same this week (consensus is for a employment change number around the +20k vicinity). If confirmed, this would be enough to support the view that RBA rate cuts remain a long way off, which looks set to keep the Aussie dollar well bid in the coming weeks.
USD
The June CPI inflation report was unambiguously good news for the Federal Reserve and financial markets. Not only did both the headline and core subindex come in below expectations, but the latter’s three-month running average is now running closer to 2% than to 3% on an annualised basis, within sight of the Federal Reserve’s target.
Markets celebrated the news, sending stocks and credit upwards and selling safe havens like the US dollar. As mentioned, the assasination attempt on Trump triggered a small dollar rebound, but this has failed to dent investor’s optimism. The door is now open for a first interest rate cut from the Fed in September, which is now fully priced in by markets, and either one or two additional ones before year end.
NZD
The Reserve Bank of New Zealand delivered a dovish hold at its policy meeting last week. There was no change in rates, but the bank said that it was confident inflation would return to target in the next six months. According to the RBNZ, price pressures remain strong, but are set to continue easing, in part due to a weakening in the jobs market.
This surprise dovish shift was viewed by investors as a clear signal that cuts are on the way in the not too distant future, potentially at the next meeting in August. Unsurprisingly, the New Zealand currency lost ground and was one of the worst performers in the G10. Tuesday’s Q2 CPI report will now be key. We continue to favour a mild underperformance in NZD relative to its Australian counterpart.
CNY
The Chinese yuan managed to recover slightly against the broadly weaker US dollar last week. Yet, the latest news out of the Chinese economy has been far from positive, with nearly every report pointing to economic woes. Today’s Q2 and June data dump is a prime example of that, showing slowing economic momentum and adding to concerns over domestic demand. Growth below 5% on an annual basis is not what investors want to see.
JPY
The yen was the big winner in the G10 last week, with suspected FX intervention from the Bank of Japan triggering a sharp snap back in the currency on Thursday. This sent the USD/JPY exchange rate crashing back below the 158 mark from above 161 to its lowest level since mid-June. While the Ministry of Finance failed to confirm that intervention took place, the nature of the move makes it pretty clear that dollar selling took place, in what was a widely expected move.
Attention will soon shift to the Bank of Japan, which will be unveiling its latest policy decision at the end of the month. An intolerance for a weaker JPY could be an argument in favour of a more hawkish BoJ. Swaps are currently pricing in less than a 50% chance of an immediate hike this month, but governor Ueda could hint at another rate increase at the following meeting in September.