AUD holding mid-range into mid-year risks.
AUD/USD has continued to gyrate within the same challenging 0.6575-0.6715 range that has been in play since early May. A late lift for USD into the end of last week was aided by more evident JPY weakness, political risks in Europe, which are becoming more acute into key elections, and US Flash PMIs, which were notably firmer than its global peers. Nevertheless, AUD/USD managed to hold steady into this week as it attempts to remain in the upper bounds of this range after last week's more hawkish tilt from RBA.
AUD holding mid-range into mid-year risks.
AUD/USD has continued to gyrate within the same challenging 0.6575-0.6715 range that has been in play since early May. A late lift for USD into the end of last week was aided by more evident JPY weakness, political risks in Europe, which are becoming more acute into key elections, and US Flash PMIs, which were notably firmer than its global peers. Nevertheless, AUD/USD managed to hold steady into this week as it attempts to remain in the upper bounds of this range after last week's more hawkish tilt from RBA.
The notably hawkish shift in RBA's tone at their June Board meeting highlights their low tolerance for any inflation pressures. The key supporting factors for AUD were RBA maintaining its "not ruling anything in or out" on policy whilst adding that it "will do what is necessary to achieve" their policy goals. RBA is more keenly focused upon the expansionary impacts of fiscal policy (from both State and Federal budgets) and less acutely concerned over the slide in household consumption.
USD had a softer tone during the earlier part of trading last week as markets focused upon a string of mildly softer US data and the potential for a return to a disinflationary path on the back of Fed's restrictive policy. Fed officials have been more nuanced, if still mixed, around the potential for easing in 2H'24, especially after US May Retail Sales undershot market consensus (rising only +0.1%m/m against consensus of +0.3%m/m with April revised to a -0.2%m/m fall from flat).
This was unwound on the release of Flash PMIs for June. There was a notable outperformance of US activity measures (Flash June Composite PMI rose to 55.1, est. 54.0) compared to weaker profiles in AU (Flash Composite PMI dipped to 50.6, prior 52.1), Japan, UK and, more notably, Eurozone (Flash June Composite PMI slipped to 50.8, est. 52.5).
AUD had gained support earlier last week from the slide in US yields to test range lows (US 10yr 4.20%) and narrowing of yields spreads (AU-US 10yr spread narrowing to under -5bps). AUD/USD lifted to 0.6680 until rising geopolitical concerns from the French Assembly elections saw a spurt in demand for USD on risk aversion. This also maintained a bid in US Treasuries, and so held US yields at lower levels despite the data shift into the end of the week.
Late last week, US Treasury added Japan to its list of trading partners that are being monitored for currency manipulation. Although there were no countries actually accused of manipulation, this monitoring of Japan's intervention in JPY gave another leg of support for USD as markets reinstated JPY carry trades. Nevertheless, intervention risks persist after Japanese officials restated on Monday their intent to act as necessary against undesirable moves in FX.
The economic backdrop for Australia's bulk commodity exports remains clouded by China's lack of demand drivers and continued reluctance of authorities to provide more material means of supporting the protracted decline in the property sector. The slide in Dalian and SGX iron ore futures has continued with Dalian CNY prices now -13.5% from highs seen in May and SGX USD prices over -16.5% lower. Copper prices also remain some -13% lower after its prior rally peaked at USD11k/mt. in May.
Central Bank activity may be lighter, but RBA Asst. Gov. Kent and Dep. Gov. Hauser will deliver speeches this week. Markets will keenly await any insights around the hawkish tilt in last week's Board communications, especially since Dep. Gov. Hauser had referenced, in his first public appearance as Dep. Gov., the importance for RBA to preserve the gains in labour markets and support struggling households as well as countering inflation that he had described as still being too high.
The prospects of month-end/quarter-end/half-year portfolio rebalancing suggests that there may be some hedging against the considerable gains that have been made in US assets and so could weigh on USD. However, the level of political risk into the first round of French election on 30th June (second round on 7th July) could easily outweigh other factors and temper attempts for AUD to push towards range resistance. French opinion polls indicate that Macron's alliance (around 20%) continues to struggle against a resilient RN (right wing, around 35%) and the Left-bloc (around 26%).
The French bond yield against Germany will continue to be a key barometer of investor sentiment around the elections that could unsettle broader risk sentiment if it generates concerns over fiscal discipline within EU. Although the spread narrowed slightly to 76bps on Monday (from 80bps for French yields above German yields), it remains at elevated levels (the spread was below 50bps in early June).
In addition to RBA speakers this week, ABS May indication for 2Q CPI will be released, covering over 75% of items within the CPI basket with insights into services inflation. Westpac-MI Consumer Sentiment, Westpac ACCI Business Survey and Westpac MI Leading Index accompany ABS Private Credit and Job Vacancies to round off Australian data releases this week.
Event risk
Tuesday
-Aus Jun Westpac-MI Consumer Sentiment
Q2 Westpac-ACCI Business Survey
-NZ Q2 Westpac Employment Confidence
-US May Chicago Fed Activity Index
June Consumer Confidence
June Richmond Fed Index
Wednesday
-Aus RBA Asst. Gov. Kent (Financial Markets)
May Westpac-MI Leading Index
May Monthly CPI Indicator (Q2)
-US May New Home Sales
Thursday
- Aus Jun MI Inflation Expectations
Q2 Job Vacancies
RBA Dep. Gov. Hauser
-NZ Jun ANZ Consumer Confidence
Jun ANZ Business Confidence
-Chn May Industrial Profits
-US Q1 (Final) GDP
May Durable Goods Orders
Jun Kansas Fed Index
May Wholesale Inventories
May Pending Home Sales
Weekly Jobless Claims
First US Presidential Election Debate
Friday
-Aus May Private Sector Credit
-NZ Matariki Public Holiday
-Jpn May Jobless Rate
Jun Tokyo CPI
May Industrial Production
-UK Q1 (Final) GDP
-US May Personal Income
May Personal Spending
May PCE
Jun Chicago PMI
Jun U. Michigan Consumer Sentiment (Final)
Sunday
-Chn Jun NBS PMIs
-Fra National Assembly Election (1st Round)
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