Last week AUD/USD traded with the 0.7800 handle for the first time since 18 March, but it starts this week around 0.7750, almost dead flat overall. In the week ahead, data includes Australia Q1 CPI, while the global focus will be the FOMC meeting, testing investor confidence in the soft US dollar.
Aussie underperforms despite iron ore surge
Last week AUD/USD traded with the 0.7800 handle for the first time since 18 March, but it starts this week around 0.7750, almost dead flat overall. This is despite the US dollar falling against all G10 currencies.
Somewhat surprisingly, the euro is the strongest G10 currency over the week, up 0.9% to around 1.2100, its strongest level since 3 March. This is despite European Central Bank President Lagarde deeming “premature” talk of slower bond purchases. More helpful for the euro has been an acceleration in the pace of vaccinations in the EU, along with a steep increase in planned vaccine deliveries in coming months.
A$ underperformance seems at odds with the 10 year highs on iron ore prices. The benchmark China spot price is around US$185/tonne, about A$240. This is much higher than assumptions in the December 2020 mid-year budget review, so there will be plenty of discussion over what this means for fiscal policy ahead of the 11 May federal budget speech by Treasurer Frydenberg.
The commodity story is more than just iron ore too, with Westpac’s daily measure of Australia’s commodity export basket reaching highs since the January peak. More hefty trade surpluses appear to be on the way, though of course there is still no relief for key service exports tourism and education.
Australia’s domestic momentum also continues, even if the fortnightly payrolls series due Wednesday will provide the first data on the impact of JobKeeper’s end. March retail sales was solid, +1.4% m/m and the Australia-New Zealand travel bubble is underway while domestic services such as sport and recreation expand capacity nationwide.
On the negative side, the length of the Perth lockdown is not confirmed as of Monday morning but it seems likely to be brief.
In the week ahead, a busy period for central bank meetings continues. Last week, along with the wary ECB, we had the Bank of Canada which reduced the pace of its bond purchases. This news appeared to be the catalyst for a half cent rally in AUD/USD.
No such sharp response seems likely from the Bank of Japan decision but there is always potential for volatility around the US Federal Reserve meeting, even if policy is expected to be firmly on hold, with the benchmark federal funds rate 0.0-0.25% and monthly bond purchases running at $80bn in Treasury securities and $40bn of agency mortgage-backed securities. The average interest rate on a US 30 year mortgage jumped about 50bp from February to March but has since eased about 30bp to 3.07% (Bankrate.com). The Fed is expected to keep stressing policy stability, with non-farm payrolls still 8 million below the February 2020 peak.
Australia’s quarterly CPI series always draws some market interest but RBA guidance is for no policy change for some time. Westpac forecasts inflation to pick up from 0.9%yr in Q4 to 1.5%yr in Q1, still a long way from the RBA’s 2.5% target.
If the Aussie has a muted response to the CPI data then its direction for the week is likely to be set by the FOMC meeting. After a strong Q1, the US dollar continues to struggle against major currencies so far in Q2, so this will be a fresh test of investor resolve.
Event risk this week
Germany Apr IFO business survey (Mon), Bank of Japan policy decision, US Apr consumer confidence (Tue), Aust Q1 consumer price index, Aust Apr 10 weekly payrolls, Federal Reserve FOMC policy decision (Wed, Chair Powell press conference 4:30am Thu AEST), US Q1 GDP (Thu), Aust Mar private credit, China Apr manufacturing and services PMIs, Eurozone Q1 GDP, US Mar personal income and spending (Fri)
