The Aussie dollar did well to hold its ground last week given global concern over China’s property sector and the US Federal Reserve which nudged its interest rate profile higher once more. China will remain in focus for A$ in the week ahead, while Australia’s domestic data calendar includes retail sales and housing.
Aussie resilient despite China property jitters and the Fed
Early last week, with extensive national holidays across North Asia, markets elsewhere fretted over struggling Chinese property giant Evergrande. Reports that Beijing would not bail it out added to the pressure on iron ore prices, with futures prices tumbling to $94/tonne on Monday and Tuesday, down a remarkable -38% from end-August. US equities sagged and the ASX 200 closed at its lowest level since June.
Given A$ is often the proxy of choice for worries over China’s economy, it made sense to see AUD/USD slip to 0.7220, a low since 24 August. But 0.7200 did not give way even when newswires reported that Evergrande missed interest payments on bonds. There was little official comment from Chinese officials but gradually a view emerged that while investors – particularly foreign – would lose money, there would not be a major threat to China’s economy or global markets. Equity markets rebounded.
Perhaps investors have already priced plenty of bad news into the Aussie, with data from US futures markets showing large net short positions as of 21 September, around when concern over China real estate was at its height.
Attention then turned to the Federal Reserve’s policy-setting body, the FOMC. The committee said that if progress continued towards its goals of maximum employment and price stability, then “a moderation in the pace of asset purchases may soon be warranted.” This was about as expected – not confirming a date to taper the pace of bond purchases but “soon.”
Somewhat more eye-catching was the quarterly update from FOMC members on their forecasts for economic growth, inflation and the likely path of the federal funds rate. This showed another two officials joined the seven already pencilling in lift-off for 2022, leaving the Fed evenly divided on the prospect of starting rate hikes next year. The median ‘dot’ for 2023 rose by another 25bp too, signalling three hikes for that year while the first stab at 2024 was for a 1.75% funds rate.
After the FOMC meeting, US 10 year Treasury yields broke multi-week trading ranges to the topside, up from about 1.30% to 1.45%. The US dollar found some support from this rise in yields, though mostly against the Japanese yen, since the Bank of Japan is committed to keeping its own 10 year government bond yield near 0%.
The Australian bond market could not ignore such a move, with the 10 year Commonwealth government bond today around 1.40%, versus 1.26% ahead of the FOMC meeting. This will have contributed to AUD/USD’s relative stability over the week.
Domestic data took a back seat last week and probably won’t offer too much distraction from coronavirus headlines this week. We will see a substantial lockdown impact on retail sales and a range of data on the housing market which should confirm ongoing substantial rises in prices but an easing in the construction pipeline. If AUD/USD is to break recent ranges, the catalyst will probably need to come from offshore developments.
Event risk this week
Aust Aug retail sales, US Sep consumer confidence, Fed Chair Powell and Treasury Secretary Yellen testify to Senate (Tue), Aust Aug dwelling approvals and private credit, China Sep manufacturing and services PMIs (Thu), Aust Aug housing finance and Sep housing prices, US Aug personal income and spending (Fri), US House vote on infrastructure bill (no set date)
