Powell punctures Aussie revival
Fed Chair Powell’s hawkish speech wiped out the Aussie’s gains last week, but it was resilient on cross rates. Australia’s data calendar picks up in the week ahead, while the global focus will be US August non-farm payrolls.
AUD/USD tracked higher for most of last week, even probing above 0.7000, only for its gains to be wiped out by Fed Chair Powell’s hawkish speech at the annual Fed conference at Jackson Hole, Wyoming. The Aussie slid back to 0.6870 as the US dollar rallied hard and equity markets slumped.
Powell managed to surprise markets even though it was widely expected that he would be firm on the Fed’s determination to reduce inflation. Powell’s previous speeches at Jackson Hole had been thematic but this time, “my remarks will be shorter, my focus narrower, and my message more direct.”
That message was in large part aimed at markets which continue to price in lower rates in late 2023. Powell argued that “The historical record cautions strongly against prematurely loosening policy.” He warned of “some pain” ahead for households and businesses, but gave no strong clue on the ongoing debate over the size of the next rate hike, on 21 September.
US yields were volatile in the initial response to Powell, but start this week sharply higher. The 2-year Treasury yield is approaching 3.50% for the first time since 2007. The US dollar rose steeply against major currencies as it gained support from higher yields and haven demand as the S&P 500 slumped -3.4% Friday, the Dow Jones more than -1000pts. Asian currencies including the Chinese yuan and Korean won are printing multi-year lows.
In this context, AUD/USD’s modest net decline over the week, to 0.6850 by Monday, is an outperformance. Among G10 currencies, only the Norwegian krone is more resilient. One factor behind A$ outperformance on crosses may be conversion of dividends from US$ to A$ for local shareholders of big Australian mining companies. Westpac calculations based on public data indicate that Q3 2022 is set to be the second-largest quarter on record for dividend conversion.
Australia’s data calendar was virtually empty last week but picks up this week, featuring July updates on retail turnover, housing and credit plus the first inputs to Q2 GDP, which is due 7 September. The US data highlight is of course non-farm payrolls on Friday, with markets still not fully priced for another 75bp hike in September. Consensus on payrolls is +300k, with an unemployment rate of 3.5%.
The Australian dollar’s commodity price support has improved steadily since mid-July, thanks once again to energy prices – LNG and thermal coal. Growth-sensitive base metals remain far less supportive, largely flatlining so far in August after heavy falls during Q2. As Covid outbreaks continue to flare around China, concern over its economy may be behind the increase in short A$ positions in futures markets recently.
Event risk
Aust Jul retail sales, UK summer bank holiday (Mon), Aust Jul dwelling approvals, US Aug consumer confidence (Tue), Aust Q2 construction work, Aust Jul private credit, China Aug official manufacturing and services PMIs, Eurozone Aug CPI (Wed), Aust Q2 private capex & 2022/23 investment plans, Aust Jul housing finance, US Aug manufacturing ISM (Thu), US Aug employment (Fri)
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