The Australian dollar traverses a wild week for metals
A dizzying move in precious metals helped propel the Australian dollar more than US2 cents higher at one stage last week, to 0.7094, before an equally spectacular breakdown on Friday saw a good amount of these gains wiped out. The Australian dollar starts the week at 0.6950 ahead of a crucial RBA meeting and US non-farm payrolls on Friday.
The Australian dollar traverses a wild week for metals
A dizzying move in precious metals helped propel the Australian dollar more than US2 cents higher at one stage last week, to 0.7094, before an equally spectacular breakdown on Friday saw a good amount of these gains wiped out. The Australian dollar starts the week at 0.6950 ahead of a crucial RBA meeting and US non-farm payrolls on Friday.
Warsh nomination upends metals and the Australian dollar
For a good part of last week, heavy speculative engagement pushed precious metals to dizzying new heights. At one point, gold was up more than 13% for the week while silver was up an eyewatering 23%. These kind of moves had all the hallmarks of momentum-driven, froth heavy, blow-off moves. The base metals were no slouches either with copper stacking on a 10% price gain at one stage too.
But on Friday in Asia, there were reports that President Trump had chosen Kevin Warsh to be the new Fed Chair. That ushered in the beginnings of a dramatic reversal for precious metals, which extended into the evening as Trump made his formal announcement. Silver fell 35% intraday, while gold fell almost 15%. These are historic plunges. Kevin Warsh is a known quantity as an ex-Board of Governor member and considered something of a mainstream choice.
This should put concerns about Fed autonomy and the de-dollarisation trade on the backburner for the time being. Markets are still puzzling over Kevin Warsh's nomination. He has been historically considered a hawk, but has recently voiced support for rate cuts.
The Australian dollar was understandably caught up in the move, clearing 0.7000 without too much fuss as metals were surging, but succumbing on Friday as markets tumbled. AUD gave back the 0.7000 handle, and in the process has relinquished its leadership position in the G10. For the first several weeks of the year, the AUD was the best performing G10 currency against the USD, but as we type, it's still on the podium, but has slipped into third place.
Q4 CPI strengthens the case for RBA hike
Australian Q4 trimmed CPI printed at 0.9% q/q and while in line with market consensus, slightly overshot the RBA's forecasts. This combined with December's resilient employment figures has left the market leaning towards a rate hike at this week's RBA meeting, with +18bp currently priced. 22 out of 28 economists are calling for a hike this week too.
With the unemployment rate tracking 0.3ppts below the RBA's Nov forecast and the annual trimmed mean CPI pace tracking 0.2ppts above forecast, there's a pretty strong case for a hike. The question is, how it's framed - is this insurance or the start of a series of moves? We aren't sure Governor Bullock will deliver the strong forward guidance that markets crave, but either way, this week's RBA is bound to produce a good amount of volatility for AUD. One thing is for sure, the latest run of data suggests consumption continued to firm into year's end and that the labour market is in good shape.
The FOMC had their first meeting of the year as well, and the US government went into partial shutdown on Friday night. On their own, these are newsworthy, but neither got much oxygen. Chair Powell sounded more upbeat on US prospects than he had for a while, and the Fed's meeting statement officially dropped concern around labour market risks. On its own, this would ordinarily have given the USD some support, but with de-dollarisation angst still high, the USD mostly ignored the Fed meeting.
AUD crosses start to go their own way
On the AUD crosses; AUD/JPY is still riding high, extending its 9 month advance. For the week it climbed 1% to above 107.00, following solid domestic inflation data and comments from Japan's PM Takaichi which outlined the benefits of a weak currency for exporters, undercutting intervention threats.
AUD/EUR spent a good part of last week building on its impulsive new year gains, extending up to just above 0.59, levels not seen since March of last year. But, the move was short lived and AUD/EUR was caught up in the metals reversal, leaving the pair at 0.5843 to start the week.
The run of news continues to chip away at AUD/NZD. This cross started the new year on the front foot, hitting 1.1693, levels not seen since 2013. But since then, it's been slowly rolling over as unmistakeable signs of a NZ rebound emerge in the data. AUD/NZD starts the week at 1.1533 and the next leg obviously depends crucially on the outcome of tomorrow's RBA meeting.
The week ahead…
This week's local and global calendars are consequential. The RBA obviously has top billing here, but offshore we also get US Jan non-farm payrolls and Japan holding a snap General Election on Sunday.
Consensus expects US payrolls to show a small improvement to +78k in Jan. The polls in Japan show that PM Takaichi's LDP is cruising towards retaking a lower house majority.
The ECB and the BoE meet as well.
Markets will be watching geopolitical risks around Iran as well. A US "Armada" is positioning itself in the region, but as of Sunday, President Trump was sounding more hopeful about agreeing to a deal with Iran. There is sure to be plenty of news on this in the week ahead.
Monday
- Australia, Japan, UK & US S&P Global Jan Manf. PMI (Final)
- Eurozone Jan HCOB Manf. PMI (Final)
- US Jan ISM Manf.
- Fedspeak; Bostic.
Tuesday
- Australia Dec Building Approvals
- RBA Monetary Policy Meeting
- US Dec JOLTS Job Openings
- Fedspeak; Bowman, Barkin.
Wednesday
- NZ Q4 Employment Data.
- Australia, Japan, UK & US Jan S&P Global Services PMI (Final)
- China Jan RatingDog Services PMI
- Eurozone Jan CPI, HCOB Services PMI (Final)
- US Jan ADP employment, ISM Services PMI
- Fedspeak; Cook.
Thursday
- Australia Dec Trade Balance
- BOE Monetary Policy Meeting
- ECB Monetary Policy Meeting
Friday
- RBA Gov. Bullock Parliamentary testimony.
- US Jan Non-farm Payrolls, Unemployment Rate, Feb U. of Mich. Sentiment (Prelim.)
- Fedspeak; Jefferson.
Sunday
- Japan Snap General Election
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