AUD/USD rallied 2 cents last week, driven by rebounding equities and commodities and a US dollar undermined by a cautious tone from Fed Chair Powell. In the week ahead, Australia’s busy data calendar includes Q2 GDP but the FX market tone is likely to be set by Friday’s US employment report.
The Aussie’s best week of 2021
AUD/USD rallied from just above 0.7100 to just above 0.7300 last week, its 2.5% gain the largest since November 2020. The drivers of the Aussie recovery do not appear to be very mysterious. Global equities (MSCI World Index) closed at a record high Friday, with nerves over Fed tightening somewhat soothed. This undermined the US dollar, which fell against most major currencies on the week.
While the US dollar was under pressure for most of the week, the sharpest movement came in response to Federal Reserve Chair Jay Powell’s keynote speech to the annual Jackson Hole conference on Friday. Much of Powell’s speech was positive on the US economy and it still seems likely that the Fed will announce a reduction in the pace of its bond purchases this year (“tapering”).
But Powell also warned against when “a central bank tightens policy in response to factors that turn out to be temporary.” Markets judged that there was no new urgency to act and the 2 year Treasury note yield dropped from 0.24% to 0.21%, while the Aussie broke through 0.7300 for the first time since 17 August.
The Aussie also found support from a rebound in many key commodity prices. Iron ore futures bounced about $20 over the week to around $158/tonne. Copper rose about 4% and aluminium hit a fresh 3 year high Friday as Chinese authorities issued new output curbs.
But Australia’s domestic news has had precious little to do with the A$ rebound. New South Wales broke the 1000 new daily coronavirus case mark and Victoria’s hoped-for short lockdown is now 25 days and unlikely to end soon, at least in Melbourne. There is hope on the horizon in the form of an accelerating vaccination program, but any substantial relaxation of activity restrictions is a Q4 story.
This leaves the Australian economy facing a substantial contraction in Q3, with Westpac forecasting -2.6% and a rebound in Q4 almost entirely dependent on state governments loosening restrictions as vaccinations hit key targets. Meanwhile we have the rather historical Q2 GDP report due this week. Westpac looks for 0.5%qtr growth, with Sydney’s restrictions only imposed late in the quarter.
Also on the domestic data calendar are updates on the still-strong housing market and what could be another resources-fuelled record high trade surplus (Westpac forecast: $12.3bn).
But given Australia’s pandemic news is likely to remain grim near term, any further AUD/USD gains are likely to rely on further US dollar decline. This leaves all eyes on Friday’s employment report, the final such survey before FOMC members update their quarterly forecasts for the 21-22 September policy meeting. The median forecast is for a steep 750k rise in non-farm payrolls and a 5.2% unemployment rate.
Event risk this week
Aust Q2 company profits, wages & inventories, UK public holiday (Mon), Aust Jul dwelling approvals, Jul private credit, Q2 balance of payments, Q2 public demand, China Aug manufacturing & services PMIs, Eurozone Aug CPI, US Aug consumer confidence (Tue), Aust Q2 GDP, Aug house prices, US Aug ADP private payrolls, Aug manufacturing ISM (Wed), Aust Jul trade balance, Jul housing finance (Thu), US Aug employment report, Aug services ISM (Fri)
