AUD/USD starts the week fragile, trading at 5½ week lows in the mid-0.66s. The local and international data slate is thin this week, but consequential events loom in late October and early November – Q3 CPI (30 Oct), US Oct payrolls (1 Nov) and the US election and the RBA (both 5 Nov).
A stellar Sept. Aussie jobs report last week briefly helped AUD regain some composure. Employment grew by a strong 64.1k, an impressive gain after 5 consecutive stronger than expected monthly prints totalling more than 200k. Unemployment was unchanged in the month, from a downwardly revised at 4.1% last month.
Local interest rate markets dialled back RBA rate cut expectations on the strong jobs data, trimming pricing for their February 2025 meeting to -20bp, from -25bp. For all of 2025, rates markets now expect 3 x 25bp rate cuts, having priced in some risk that the RBA could deliver 4 x 25bp cuts before the jobs data.
AUD/USD encouragingly reclaimed the 0.6700 handle into the back-end of last week. But bigger crosswinds are taking over in the new week, sending AUD back to lows in the mid-0.66s. More encouragingly, AUD/JPY is holding above 100.0 and AUD/NZD is still sitting above 1.1000.
The Harris-Trump US presidential election race has become a crucial consideration, and with swing-state polls trending towards Trump, markets are pricing in a greater risk of more fiscal stimulus and trade tariffs.
Long term US yields have already backed up considerably in recent weeks, around 50bp, as US jobs and inflation data came in stronger, undercutting Fed rate cut prospects. But yields have risen further to start the week, touching 3-month highs at 4.19%. Matching that, the tone from Fed officials has shifted in recent weeks. The strong message is that the 50bp Sept. rate cut was a one-off to recalibrate and reposition policy amid shifting risks. Going forward a more measured and slower pace of Fed rate cuts is favoured.
Fedspeakers early this week have continued to reinforce that message. At the same time, “Red sweep” US election bets are taking over.
High quality polls point to an evenly divided Harris-Trump race, within the margin of error. But there has been a clear trend favouring Trump in swing state polls lately. Just as critically, Republicans are consolidating their advantage to win majorities in both houses of Congress, altogether boosting expectations for a “Red sweep”.
The widespread belief is that divided governments produce more moderate spending and tax outcomes, and as such it is favoured by markets. But a “Red sweep” would tip the risks towards larger parts of Trump’s agenda getting through congress, including an extension of his 2017 tax cuts (due to expire in late 2025) and another reduction in the corporate tax rate. The independent Committee for a Responsible Budget estimates that Trump’s policy proposals will add USD7.5trn to US deficits over a 10 year window.
Trump is also proposing a blanket 10% tariff on all US imports and a 60% tariff on China imports, effectively tripling and broadening the China levies applied in his 1st term. The combined impact of tax cuts and tariffs point to a disruptive picture for global trade and adds to US inflation risks.
Policy news out of Beijing remains broadly reassuring and analysts are bumping up their China growth forecast for 2024 and 2025.
Plans are afoot for a large debt swap plan to alleviate the dire state of local government finances. Additional capacity to clear unsold housing inventory is also in the works, by allowing local governments to issue bonds to purchase unsold homes. China’s Housing Ministry last week announced plans to expand their white-list property funding support program – to CNY4trn (around USD550bn). This plan speeds up the delivery of unfinished presold homes, via special loans to banks that are then channelled to property developers.
But there are still a lot of hurdles. Even with cheap funding, banks are cautious about taking on property credit risk, given the sheer scale of excess inventory across lower tier China cities. Iron ore prices seem to suggesting much the same. Iron ore prices are at around $100t, well down from their highs closer to $115/t hit earlier in the month.
Preliminary October PMIs are the only release on Australia’s local calendar this week. PMIs are a key monthly data point for US and Eurozone markets, but in Australia the series is yet to develop any real credibility with markets.
The global calendars are pretty quiet too. The IMF’s Autumn annual meeting in Washington will produce a few headlines, including comments from BoE Governor bailey, ECB president Lagarde and RBNZ Governor Orr.
The Fed’s Beige Book, an anecdotal summary of economic conditions across the US, is also out. While this report mostly falls under the radar for markets it is thought to be one of Chair Powell’s favourite barometers. The hard US data in recent weeks points to another robust growth performance in Q3, above 3% annualised. Soft surveys and anecdotes, including the Beige Book portray softer conditions.
Japan’s holds a snap general election this weekend. Polls show that the LDP, led by newly installed Prime Minister Ishiba, and their coalition partner, will probably win, but with a much reduced majority. Ishiba is promising a decent spending package if he wins, to cushion cost of living pressures. That will figure into the BoJ’s thinking on the outlook and could lead to some volatility in the yen crosses early next week.
Altogether there isn’t a lot for AUD in this week’s calendars. Late October and early November looks a lot more consequential – Q3 CPI (30 Oct), US Oct payrolls (1 Nov) and the US election and the RBA (both 5 Nov).
Tuesday
-2024 Annual IMF/World Bank meetings, Washington
Wednesday
-Eurozone ECB President Lagarde speaks
-UK BoE Governor Bailey speaks
Thursday
-NZ RBNZ Governor gives speech
-Australia, Japan, Eurozone, UK, US, Oct prelim manufacturing and services PMI.
-Eurozone ECB President Lagarde speaks
-UK BoE Governor Bailey speaks
-US Fed Beige Book
-Canada BoC monetary policy decision
Friday
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, US Oct payrolls (1 Nov) and the US election and the RBA (both 5 Nov).){kind=link}