Last week produced two game-changers for the Aussie dollar outlook. Australia’s booming May jobs data points to an earlier RBA rate hike, while in the US, yields jumped as the FOMC sounded upbeat on the economy. The Fed meeting sparked a surge in the US dollar which knocked AUD/USD below 0.75 for the first time in 6 months. The Fed should remain key for A$ in the week ahead.
The Fed punctures the Aussie
Australia’s key day was Thursday, with RBA Governor Lowe speaking to farmers in Queensland, just ahead of the May labour force survey. Lowe was broadly upbeat, stressing that Australia’s economic recovery from the pandemic is “better than elsewhere in the world.” Lowe’s speech included a chart showing Australia’s labour market having outperformed most other nations through the pandemic. On policy, Lowe reviewed the options under consideration at the July Board meeting and ruled out one of them – ending bond purchases once the current $100bn program is complete.
Lowe’s positive view of the pace of Australia’s jobs recovery was of course amplified by the May survey. Total employment jumped 115k after the -31k pullback in April which aligned with the end of JobKeeper. May produced the largest monthly rise in full-time employment on record (98k). The surge in jobs was so large that even with a rise in labour force participation from 65.9% to 66.2%, the unemployment rate tumbled from 5.5% to 5.1%. This is actually a touch lower than pre-pandemic.
Westpac now expects the unemployment rate to fall to 4.0% by June 2022 and to 3.8% by end-2022. This should boost wages growth and inflation, prompting the RBA to start raising the cash rate from 0.1% in Q1 2023.
As for the Aussie’s commodity price support, the US dollar rally weighed on US$-denominated commodities, as did China’s attempt to cool prices by releasing supply from state reserves. Copper had its worst week in over a year, down -8.5% , zinc fell -6.7% and gold was -6% on the week. However, iron ore prices at $215/tonne remain just shy of all-time record highs, thermal coal prices have risen to decade highs and metallurgical coal prices have hit 2 year highs.
So the steep slide in AUD/USD is clearly in response to the global scramble for US dollars after the FOMC meeting rather than domestic news. The Fed of course did not change its key policy settings, keeping the federal funds rate at 0.0-0.25% and maintaining bond purchases at $120bn per month.
But in its quarterly forecasts, FOMC members raised their forecast for core inflation this year from 2.2% to 3.0%yr, GDP growth to 7.0%yr and the median projection for the funds rate at end-2023 was boosted from 0.1% to 0.6%. Moreover, Chair Powell said that the conversation about reducing the pace of bond purchases had begun, though he was keen to douse any talk of a change any time soon.
The US dollar jumped sharply on both Thursday and Friday, driving many currencies to multi-month lows. AUD/USD traded below 0.7500 for the first time since 21 December. But the change in the US dollar’s yield support has been quite mixed. Short end yields are pricing in an early start to rate hikes, with the 2 year Treasury note yield up from 0.16% to 0.26%. But after initial flickers higher in yield, the 10 year Treasury yield fell to 1.37% on Monday, a low since February, the 30 year down to 1.95% versus 2.20% pre-FOMC.
Trading volumes are likely to remain high in the week ahead as investors weigh the US economic outlook and absorb a flurry of commentary from Fed officials, most notably Powell testifying to a House committee whose members will want to hear a commitment to supporting jobs. Australia’s domestic calendar is unlikely to offer much distraction, though the course of the “Bondi cluster” of Covid-19 cases in Sydney could have significant implications for consumer spending.
Elsewhere, the Bank of England MPC should strike a cautious tone as the UK recorded 65.6k new cases over the week, up 31%, and England’s activity restrictions were extended.
Event risk this week
Aust May retail sales (Mon), Aust weekly payrolls to 5 June, Fed Chair Powell testifies to Congress (Tue), Eurozone & US June Markit manufacturing and services PMIs (Wed), Germany June IFO business survey, Bank of England MPC policy decision (Thu), US May personal income and spending (Fri). Multiple Fed speakers each day