Aussie Dollar Recovers on Rate Optimism | Weekly Update

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16 September 2024

Written by
Ebury

AUD

The Australian dollar has managed to recover some of its losses following the early September risk-off period. A shift in global sentiment has encouraged investors to buy back the Aussie dollar, especially with the increased interest rate differential. While domestic economic updates have been sparse, Reserve Bank of Australia Governor Sarah Hunter shared some optimistic news, underscoring the robustness of the labour market and suggesting that there is no immediate urgency to lower interest rates. We expect Governor Jones to echo these sentiments this Tuesday, although any market reaction may be limited as focus shifts to the Australian jobs report on Wednesday and the PMIs later in the week on Friday. As previously mentioned, the divergence in interest rates remains a crucial element, making it difficult for the AUD to respond significantly to factors beyond the Federal Reserve’s decisions.

USD

Dismal Eurozone industrial production numbers will weigh less on that decision than sticky inflation numbers and relatively generous recent wage agreements, as the problems of the German industrial sector are structural and have little to do with interest rates. Weekly Report 2 The inflation number in the US came out higher than expected, as the core subindex increased 0.28% on the month, its second consecutive increase. Our favourite inflation indicator, the three-month core running average, has stopped falling and is perking up, though it is still close to the Fed target.

However, markets chose to ignore the number, as well as further indications that there is little job destruction in the labor market, and relentlessly increased its pricing of a jumbo move by the Fed this week to as much as 60%. We think this is excessive, expect a 25 bp cut and consequently think there is room for a tactical strengthening of the US dollar this week.

NZD

Like its Australian counterpart, the New Zealand dollar experienced some relief last week due to improved risk sentiment. In contrast to the Reserve Bank of Australia’s stance, however, the dovish approach of the Reserve Bank of New Zealand contributed to the NZD solidifying losses against the U.S. dollar. Macro-wise, the only factor worth noting from last week was the NZ Business PMI index, which remained in contractionary territory, registering a disappointing figure of 45.8, below the anticipated 47, which shows that the manufacturing sector continues to face significant challenges.

This week’s second quarter GDP figures, due on Wednesday, will put the New Zealand economy to the test. Economists are forecasting a modest 0.2% expansion. Any number below that level could trigger renewed weakness in the NZD as markets will likely price in a faster easing cycle. In addition to GDP, the July trade balance report on Sunday will also be closely monitored.

CNY

Last week brought another round of disappointing headlines from China, with the August data dump failing to show a reversal in the fortunes of Asia’s largest economy. Industrial production and retail sales slowed and real estate data showed few encouraging signs. Moreover, the unemployment rate rose unexpectedly to its highest level in 6 months (5.3%). The above is only a portion of the recent readings, most of which point to gloom and particularly weak consumer demand. With numbers like this, reaching the official target of ‘around 5%’ this year seems highly unlikely if not borderline impossible.

Although certainly not favourable, thus far, the data has a limited impact on the yuan. The currency has actually edged higher against the US dollar recently, helped by the greenback’s weakness. Markets hope for more stimulus but these calls have thus far fallen on deaf ears. After a weak credit report, the PBOC has promised to do more to support the situation, but investors want to see the fiscal side working harder. Most of the attention in the coming days is set to focus on the outside news, although the MLF decision (particularly the rollover) and LPR rate setting are still worth noting. No changes to these rates are expected for now.

JPY

The Japanese yen extended its impressive rally, outperforming all of its G10 peers last week and reaching its strongest position against the US dollar this year. Increased market bets for rate cuts in the US and subsequent weakness of the US dollar certainly helped but it seems that investors continue to turn more bullish on the yen. Domestic news released last week was plentiful and provided a mixed picture.

A downward revision to Q2 growth did not change the landscape massively, with the Japanese economy still performing well. While the strong economic performance, inflation, and wage pressures might warrant monetary policy tightening, conditions have effectively tightened due to the strengthening of the Japanese yen.

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