Market Briefing: Let's make a deal
Dealmaker. Trade optimism supported US equities & USD at end of last week. AUD & NZD drifted a little lower. EUR ticked higher this morning.
US/EU deal. Over weekend US/EU announced a 15% tariff framework. Deal is similar to US/Japan. More 'stability' but economic headwinds remain.
Event Radar. Q2 AU CPI due (Weds). In the US this week earnings season continues, Q2 GDP & non-farm payrolls are out, & US Fed meets.
Global Trends
There was some relative outperformance in US markets at the end of last week. In contrast to modest falls across European/Asian equities on Friday the US S&P500 (+0.4%) extended its upswing and touched a fresh record high. The S&P500 is almost ~9% higher year-to-date and ~32% above its early-April panic sell-off lows. Solid earnings results and optimism about US trade developments were supportive factors. These forces also helped the USD index edge up a bit, though this was mainly due to strength against the JPY (USD/JPY has risen to ~147.67, just below the mid-point of its 2025 range) and GBP (now ~$1.3442). Elsewhere, EUR (the major USD alternative) ticked up (now ~$1.1763), while the NZD (now ~$0.6022) and AUD (now ~$0.6574) drifted slightly lower.
The more positive expectations about the trade outlook were somewhat crystallized over the weekend after the US and EU announced they had agreed to a 15% tariff framework. This has given the EUR a little boost this morning. At face value the deal appears similar to the one agreed by the US and Japan. According to the EU the 15% levy will be on all US imports from the region, a different view to President Trump who initially stated that pharmaceuticals and metals would be excluded. The EU also committed to purchase US$750bn in US energy products, invest in the US, and expand military equipment purchases. On the one hand this deal, and the others that have been agreed, bring a degree of “stability” and “predictability”. However, on the other hand we still think that over the medium-term the higher import costs faced by US corporates and consumers may act as sand in the gears of the economy, and can create headwinds for trade/production outside of the US. The EU is one of US’ largest trading partners (it accounts for ~20% of US imports). With respect to US/China trade relations it was also reported that the current ‘truce’ (due to expire on 12 August) might be pushed out another 90 days.
Looking ahead it is a full macro schedule this week. The Bank of Canada (Weds night AEST), US Fed (Thurs morning AEST), and Bank of Japan (Thurs) all meet, the US’ self-imposed tariff deadline is approaching (Sat AEST), and US earnings season continues with Microsoft, Meta, Amazon and Apple reporting. Data-wise, Australian Q2 CPI (Weds) and China PMIs (Thurs) are due, while in the US Q2 GDP (Weds), the PCE deflator (Thurs), non-farm payrolls and the manufacturing ISM (both Fri) are in the spotlight. On balance, we believe the risks are tilted to the US data continuing its run of positive surprises, with the US Fed also set to hold interest rates steady as it awaits more clarity on tariff impacts. If realised, we think this mix could see the USD (which is tracking below our ‘fair value’ estimate) recapture some more lost ground.
Global event radar: US GDP (Weds), BoC Meeting (Weds), FOMC Meeting (Thurs), BoJ Meeting (Thurs), China PMIs (Thurs), EZ CPI (Fri), US Jobs (Fri), US Tariff 'Pause' (Sat), BoE Meeting (7th Aug), RBA Meeting (12th Aug), US CPI (12th Aug), US/China Trade Truce (12th Aug), US Retail Sales (16th Aug)
Trans-Tasman Zone
The firmer USD on the back of the bout of US trade optimism exerted a little downward pressure on the AUD and NZD at the end of last week (see above). That said, the moves haven’t been overly large. At ~$0.6574 the AUD is still near the upper end of its multi-month range while the NZD (now ~$0.6022) is within 1.6% of its year-to-date peak. Reflecting the push-pull forces washing through markets the AUD has been more mixed on the crosses. While the AUD has slipped back against the EUR (-0.4%), NZD (-0.1%), and CNH (-0.1%), it has strengthened versus the JPY (+0.1%), GBP (+0.3%), and CAD (+0.2%).
Locally, attention will be on Q2 Australian CPI (released Wednesday). The quarterly inflation data is a comprehensive read on the price pressures across different parts of the economy. Based on the signals from the monthly CPI gauge and other forward indicators we think the Q2 data should show a cooling in headline and core inflation, with the latter forecast to edge down closer to the mid-point of the RBA’s 2-3% target band (consensus 2.7%pa). If realised, we believe that this and the cracks appearing in the Australian labour market should see the RBA deliver more interest rate relief in August after it held firm earlier this month. From our perspective, a softer Australian CPI pulse should reinforce expectations looking for ~3 RBA interest rate cuts by Q1 2026. This, combined with our thoughts that the USD may garner support from the incoming US data such as Q2 GDP (Weds night AEST) and monthly jobs report (Fri night AEST), and/or an on-hold US Fed (Thurs morning AEST), could exert downward pressure on the AUD over the near-term.
Moreover, as mentioned previously, we would also highlight that the AUD has tended to have a negative seasonal bias in late-July/August. AUD/USD has weakened in August in 21 of the past 28 years. From our perspective limited additional US trade deals before its self-imposed deadline (1 August), contrasting US and Australian data like a rebound in US GDP and stepdown in Australian inflation, a patient US Fed (Thurs), a RBA rate cut (12 August), and/or signs of tariff induced US inflation (12 August), could be catalysts for this pattern to repeat in 2025.
AUD & NZD event radar: AU CPI (Weds), US GDP (Weds), BoC Meeting (Weds), FOMC Meeting (Thurs), BoJ Meeting (Thurs), China PMIs (Thurs), EZ CPI (Fri), US Jobs (Fri), US Tariff 'Pause' (Sat), NZ Jobs (6th Aug), BoE Meeting (7th Aug), RBA Meeting (12th Aug), US CPI (12th Aug), US/China Trade Truce (12th Aug), AU Jobs (14th Aug), US Retail Sales (16th Aug)
AUD levels to watch (support / resistance): 0.6480, 0.6530 / 0.6600, 0.6630
NZD levels to watch (support / resistance): 0.5940, 0.5980 / 0.6040, 0.6070
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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