Aussie loses its uptrend mojo
AUD/USD touched a 6½ month high of 0.6799 on 11 July, but it’s been mostly one-way trade since then. Six consecutive daily declines have sent the unit back to 0.6665, leaving AUD/USD sitting firmly back inside the rough 0.6600-0.6700 range that held through May and June. AUD has also given up much of its recent outperformance on key crosses too. There are no major market moving data releases in Australia until the Q2 CPI on 31 July. The global week ahead calendars are very thin too, leaving the focus on the US election and key earnings.
Aussie loses its uptrend mojo
AUD/USD touched a 6½ month high of 0.6799 on 11 July, but it’s been mostly one-way trade since then. Six consecutive daily declines have sent the unit back to 0.6665, leaving AUD/USD sitting firmly back inside the rough 0.6600-0.6700 range that held through May and June. AUD has also given up much of its recent outperformance on key crosses too.
AUD/EUR was holding onto 13-month highs late-June through to mid-July (0.6200-0.6250). But in recent days AUD/EUR has slipped back down to 0.6125. AUD/JPY touched 33-yr highs at 109.37 on 11 July, but it has since declined to around 105.00. AUD/JPY’s reversal was initially triggered by another round of MoF/BoJ intervention on 11 July. Downside pressure on the JPY-crosses intensified further last week after critical comments about the weak yen from Republican presidential nominee Trump, raising the prospect that a potential Trump administration may move to weaken the USD.
There has been no change in market thinking around the Fed policy outlook. If anything US labour market and inflation data are downshifting, reassuring expectations that the Fed is on a steady course to start cutting rates in September.
Meanwhile in Australia, rates markets are clinging to modest rate hike expectations, assigning a 25% chance over the next several months. Altogether interest rate differentials between Australia and the US continue to lean in favour of AUD/USD holding onto the higher terrain near 0.6800 that it claimed in mid-July.
The main catalyst for AUD/USD’s latest setback back into May-June ranges is a combination of renewed weakness in commodities and a volatile US presidential election news cycle that has put the November race into uncharted territory.
Online betting markets boosted the probability of a Trump victory to almost 70% following the failed assassination attempt and into the GOP convention. That nudged markets into “Trump trades”, exposures based around even more expansionary US fiscal policy settings and higher tariffs.
In FX markets, that takes the form of a stronger USD. But that line of thinking was upended by a Bloomberg Businessweek interview released last week. Trump protested the strong the USD, singling out the yen and the yuan, and raising the prospect that a potential Trump administration may move to weaken the USD. President Biden’s decision to exit the race has added another wrinkle of uncertainty around the “Trump election trade”.
Altogether markets are now taking a more cautious stance over what could be in store for the USD under a possible Trump presidency. That, and an aggressive shift out of favoured tech sector trades last week saw market volatility gauges spike, upsetting AUD/USD’s recent bullish momentum.
On the commodities front, spot iron ore slipped around 5% last week, to $103.65/t, while the LMEX composite base metals index slipped to 3 1/2mth lows.
These commodity price declines followed weaker than expected Q2 GDP data for China and signs that rebound momentum in the monthly data is softening. China's Third Plenum contained very little for markets too, with the focus mostly on fiscal reform and the known ongoing transition to new hi-tech growth sources. Once again there were no "all-out" stimulus plans announced, though the PBOC increased support for the economy with surprise interest-rate cuts to start this week. The PBOC cut their 7-day reverse repo rate, which is becoming a key short-term policy rate, for the first time in almost a year.
There are no major market moving data releases in Australia until the Q2 CPI on 31 July. The global week ahead calendars are very thin too, leaving the focus on the US election and key earnings.
A lower than expected June CPI in Canada and a softer June employment update have markets assigning a 90% probability that the Bank of Canada will lower its overnight policy rate this week.
In the US, a soft details in the June CPI and PPI data have raised expectations for another encouraging June PCE (Friday), the third in a row in line with the Fed’s 2% target. That, along with a likely decent Q2 real GDP, around 2% annualised, will spur more soft-landing talk, keeping the door wide open to a September Fed rate cut.
Event risk
Wednesday
-Australia, Japan, UK, Eurozone & US prelim Jul manufacturing and services PMIs
-Bank of Canada monetary policy decision
Thursday
-US advance Q2 GDP
Friday
-Japan Tokyo Jul CPI
-ECB President Lagarde speaks
-2024 Paris Olympics Opening Ceremony
-US Jun Personal Consumption Expenditure (PCE) price deflators
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