The Aussie finally stabilised last week, with US dollar price action mixed and China stepping up its defence of the yuan. This week’s crowded calendar includes Australia July CPI and Q2 capex, a speech by RBA’s Bullock, Eurozone August CPI and US non-farm payrolls.
The Aussie climbed off the mat last week, holding its ground against the US dollar and rising modestly on most key cross rates. Several factors seemed to be helping after about 5 weeks of pressure.
On Wednesday, the US dollar slipped in line with US yields, as advance August PMI surveys reported a slowdown in both manufacturing and services. This was AUD/USD’s strongest day of the week, as it reached what turned out to be the week’s high at 0.6488.
Also lending support on Wednesday was a rebound in equity prices, MSCI World jumping 1%, its best day since 13 July. This rally may have been at least partly inspired by the fall in US rates, but at times last week there was also an improvement in sentiment as Chinese authorities strengthened their attempts to shore up the yuan and – more difficult – restore confidence in local equity markets.
This continued over the weekend, when China’s Ministry of Finance announced it was cutting stamp duty on share transactions from 0.1% to 0.05%, sparking a strong opening to trade to start the week. But investors generally view China’s policy steps as too timid. This included the decision to hold steady at 4.20% the 5-year loan prime rate which is closely linked to mortgage rates. Economists had expected a 15bp cut.
It may be that a very downbeat China view is already priced into markets. The weekly report on US futures markets shows asset managers held a record A$ net short position last week, equivalent to -AUD9.3bn. This could mean that even a fresh round of negative headlines around China’s property market or growth prospects might not have a major impact near term.
The Australian dollar’s direction this week should at least be informed by a lot more data and commentary than last week’s very quiet calendar. Markets seem likely to focus most closely on a speech by RBA Deputy Governor Bullock, July consumer prices and Q2 readings on business investment and construction that will help shape forecasts of Q2 GDP due 6 September.
Of these, July CPI is probably most market-sensitive. Consensus is 5.2%yr versus 5.4%yr in June, but Westpac looks for 4.8%, assuming some downward pressure from state electricity rebates.
Whether the US dollar’s yield support steps higher again will also be key. Markets were volatile as Fed Chair Powell spoke at the annual Jackson Hole conference, but the 2-year yield closed higher on the week. At 5.07%, it is matching its early March level, before it tumbled in response to regional bank failures.
US data is released throughout the week but of course the August employment report is the highlight. Consensus is for non-farm payrolls growth to slow to 150k from 172k but for the unemployment rate to remain at 3.5%.
Event risk
Aust Jul retail sales, UK bank holiday (Mon), RBA Deputy Governor Bullock speaks, US Aug consumer confidence (Tue), Aust Jul CPI, Q2 construction work and Jul dwelling approvals, US revised Q2 GDP (Wed), Aust Q2 private capex, 2023/24 investment plans and Jul private credit, China Aug manufacturing and services PMIs, Eurozone Aug CPI, US Jul personal income and spending (Thu), Aust Aug home prices, Jul housing finance, Singapore holiday, US Aug non-farm payrolls, Aug ISM manufacturing (Fri).
