AUD/USD has closed with a 0.77 handle for 8 consecutive trading days, but it has spent increasing time at the lower end of its ranges. Last week the Aussie lost more ground against EUR and GBP as soft Australian data kept a lid on yields and commodity prices fell.
Aussie loses more ground on cross rates
AUD/USD has closed with a 0.77 handle for 8 consecutive trading days, highlighting that range trading continues. But it has spent increasing time at the lower end of these ranges. Last week the Aussie lost more ground against the euro and British pound.
Its underperformance against European currencies may partly reflect the rapid pace of vaccine rollout in the UK and EU ahead of the summer tourism peak. The EU is reportedly planning to allow vaccinated non-EU tourists from selected nations, a stark contrast to Australia.
Commodity prices also lost momentum last week, after rapid gains and with China’s government looking at various ways to cool the price surge. Spot iron ore on Friday dropped below US$200/tonne for the first time since 5 May, while copper, aluminium and nickel fell about 3-4% over the week. However, Australian coking coal (steel-making) is up 10% so far in May, leaving Australia’s overall commodity export basket not far short of multi-year highs.
Yield spreads seem to be helping keep a lid on the Aussie. On our calculations, the RBA’s A$5bn in weekly asset purchases is driving faster growth in their balance sheet than any other G10 central bank this year. That is arguably capping the Aussie via the AU-US 10 year bond spread, which today is only about +10bp.
The RBA’s July meeting will be crucial for AUD, where the Board will consider whether to extend the 0.1% yield target from the April 2024 bond to the November 2024 bond and whether they will extend bond purchases when the current A$100bn tranche ends in September. Last week’s wages cost and jobs data will not have given the RBA the confidence that support can be weaned.
Australian wages grew 0.6%qtr in Q1, leaving annual growth at just 1.5%yr. Perhaps more importantly for the RBA, the April labour force survey covered the first month after the expiration of the JobKeeper program. The -31k drop in total employment compared to expectations of a 20k rise. While the unemployment rate slipped to 5.5%, this was flattered by a sharp fall in the participation rate.
Such data pushes back against forecasts for the RBA to start easing back on monetary support. This week we will see Australian construction and capex data which will help shape forecasts for Q1 GDP due on 2 June. Ahead of these releases, Westpac looks for Q1 GDP to have risen 1.6%qtr, returning the annual rate to positive territory at +0.7%.
As for the US dollar, it remains fragile against e.g. the euro, British pound, Swiss franc and Canadian dollar, seesawing on mixed economic data and mixed Fed commentary. There are now 2 regional Fed presidents (Dallas, Philadelphia) calling for the FOMC to debate when to slow the pace of bond purchases from the current $120bn per month. And the US dollar rose slightly on the optimistic (anonymous) comments in the April FOMC meeting minutes. But the most senior Fed members seem to be on the same page, with Chair Powell, Vice Chair Clarida and Governor Brainard last week continuing to argue for policy patience.
Event risk this week
Germany, France holiday, Fed’s Brainard speaks on digital currencies (Mon), Aust weekly payrolls, Bank Indonesia policy decision, Germany May IFO business survey, US May consumer confidence, Apr new home sales (Tue), Aust Q1 construction work, RBNZ policy decision (Wed), Aust Q1 business investment and planned 2021/22 capex, Bank of Korea policy decision, US jobless claims week to 22 May, Apr durable goods orders, revised Q1 GDP (Thu), Apr US personal income and spending (Fri)
