Are hopes over China trade helping the A$?
AUD probed multi-week highs around 0.6800 last week before slipping back somewhat as the US dollar found yield support. Australia’s low-key calendar this week leaves the focus on jittery US markets and China GDP data.
After more than a month, AUD/USD finally traded outside the 0.6600 to 0.6800 range in Friday New York trade, only to quickly slide back to around 0.6700, where it starts the week.
After a wobble to a low of 0.6620 last Monday, the Australian dollar began to find its feet. Local data and events lent some support. Westpac’s consumer sentiment index jumped 9.4% in April, albeit still sitting well inside historically pessimistic territory.
Australia’s unemployment rate held at 3.5% in March, holding at near 50-year lows even as female workforce participation hit a record high of 62.5%. Employment jumped 53k, the second consecutive strong month after unusual declines in December and January.
We also heard from the RBA again, as Deputy Governor Michele Bullock said the April pause was consistent with a preference to limit the damage to the job market. She also noted that pausing during tightening cycles is very common. Her views didn’t change market pricing much, markets implying about a 25% chance of the RBA raising the cash rate by 25bp to 3.85% in May (which is Westpac’s view).
A more positive trade outlook may have helped AUD/USD push higher over the week. While iron ore prices eased back to $115/tonne, the LME base metals index rose about 3% and unexpected strength in China’s trade position added to optimism over China’s March activity data due this week.
Moreover, Australia-China trade relations continue to thaw. Australian Foreign Minister Penny Wong announced that Australia would pause its World Trade Organization proceedings against China because while China has agreed to a 3-month review of its 80.5% tariffs on Australian barley exports. Australian wine exports may be next in line for relief.
The more encouraging mood in Australia’s diplomatic relations with its largest trading partner may not be evident in AUD/USD but it may be a factor helping the Aussie rebound against the Kiwi. The cross was 1.0710 before the RBNZ’s shock 50bp hike on 5 April which knocked it below 1.0600 but it starts this week above 1.08.
Last week’s sharpest AUD/USD movements were in response to swings in the US dollar and US yields, especially in response to various US March data releases. US consumer price inflation printed at 5.0%yr, a fraction below consensus, producer prices softened but retail turnover was a touch firmer than expected.
US yields were overall somewhat higher but the US dollar mostly softer. Market pricing for +25bp at the FOMC’s 3 May meeting nudged up to 80%. Yet markets also price 50bp of Fed rate cuts by year end as the discussion over a potential US recession continues.
Event risk
RBA Apr minutes, China Q1 GDP and Mar industrial production and retail sales, Germany Apr ZEW investor sentiment, UK Feb unemployment (Tue), EZ final Mar CPI, UK Mar CPI, Fed Beige Book (Wed), NZ Q1 CPI (Thu), Japan Mar CPI, Advance April S&P Global manufacturing and services PMIs in Aust, Japan, EZ, UK, US (Fri)
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