The Aussie followed 3 days of punishment after the FOMC meeting with 5 days of (modest) gains last week. Commodity prices remain very supportive but FX trade is likely to be wary ahead of Friday’s US payrolls data and next week’s key RBA meeting.
US payrolls loom over A$ recovery
The Aussie dollar is being torn in opposite directions by powerful fundamental forces. It slumped from above 0.77 to below 0.75 in the week of the FOMC meeting (through 18 June). The Federal Reserve’s move to projecting higher rates sooner, its upbeat view on job creation in coming months and a shift to flagging upside risks to its inflation projections supported the US dollar as 2 year yields jumped to highs since April 2020.
This extended to last Monday when AUD/USD reached a low of 0.7476, its weakest point since 21 December 2020. However, the US dollar started to lose momentum that day. Perhaps most influential was the rebound in US equities. The greenback tends to outperform when share market volatility picks up – in simple terms, if the US stock market falls on a given day, AUD/USD normally does too, and vice versa. This correlation was seen most dramatically in the 2008 financial crisis and again in early 2020.
So the rebound in US equities to another record high on Friday was consistent with AUD/USD’s push above 0.76 that day. The role of relative yields is somewhat murkier. On the US side, Fed Chair Powell tried to dampen rate hike talk somewhat but markets are almost fully priced for a rate rise by December 2022. US bond yields however have been volatile and ultimately little changed, the 10 year Treasury at 1.52% today versus 1.49% pre-FOMC.
And of course Australian yields have also been on the rise. Westpac expects the RBA to begin raising rates in early 2023, having ceased bond purchases or QE by mid-2022. A number of other forecasters have made similar changes to their RBA views. The yield gap between Australian and US 10 year bonds remains within familiar ranges, though the 2 year gap has moved a little further in the US dollar’s favour.
Commodity prices meanwhile are very solid support for the Aussie. Australia’s preliminary May data showed a surge in exports, driven by iron ore, coal and meat. This week we will see the full May report, which Westpac forecasts will reveal the first surplus of more than $10 billion. This would be the 41st consecutive monthly surplus. As for June exports, we note that iron ore is still well above $200, prices are surging for both thermal and coking coal, while liquefied natural gas prices are rising in line with crude oil which made highs since October 2018.
Less positive of course is the rise in Australia’s new coronavirus cases, especially in Sydney but with activity restrictions of varying degrees in most states and territories. This will dampen the mood somewhat at next Tuesday’s RBA Board meeting.
This week’s local calendar seems unlikely to have much impact on AUD, leaving markets wary heading into the US employment report Friday night. Judging by recent months, there is plenty of scope for surprise to the consensus forecast of a 700k rise in non-farm payrolls and a dip in the unemployment rate to 5.7%. As of the May data, payrolls were still 7.6 million below the February 2020 peak.
Event risk this week
RBNZ Governor Orr speaks (Tue), Aust May private credit, China official June manufacturing and services PMIs, US June ADP private payrolls (Wed), Aust May trade balance, Aust June home prices, US June manufacturing ISM (Thu), Aust May housing finance, US June employment report (Fri)
