Market Briefing: US economic worries & the USD
Upbeat tone. US equities have rebounded over recent days, while bond yields & the USD lost ground. AUD & NZD have edged a little higher.
US macro. A run of weak US data has boosted Fed rate cut expectations. US CPI inflation & retail sales are a couple of important releases out next week.
Data flow. China trade data due today. Bank of England expected to cut rates. Next week RBA looks set to lower rates after holding steady in July.
Global Trends
Questions about the health of the US economy, an adjustment in interest rate views, and a few fresh tariff related headlines have been in the market drivers’ seat over the past few days. US equities have rebounded from last Friday’s negative jobs report inspired losses with the S&P500 (+0.7%) clawing back more ground overnight. US bond yields are also lower compared to where they were tracking a week ago with economic worries bolstering expectations the US Fed will deliver a stream of interest rate cuts from the September meeting. Markets now see a September Fed rate cut as a ~96% chance with more than 3 reductions factored in by next March. This adjustment has also flowed through to FX with the USD slipping back. This has helped other currencies like the EUR (now ~$1.1662), NZD (now ~$0.5930), and AUD (now ~$0.6503) edge higher over recent days.
In terms of the data, as mentioned last Friday’s US labour market report showed a stepdown in job creation, particularly across the private sector, sizeable downward revisions to previous results, and a higher unemployment rate. Added to that the ISM surveys, a forward looking gauge of activity across the manufacturing and services sectors had some ‘stagflationary’ vibes with activity and employment components weakening while prices paid rose (see chart below). The impacts of the policy uncertainty and higher import costs are bubbling to the surface, in our opinion. And with tariffs still being adjusted and used as a bargaining chip these economic headwinds look set to remain for a while. Overnight, President Trump said Indian imports will be subject to an additional 25% tariff for its ongoing purchases of Russian oil. This is on top of the 25% rate goods from India already face. Additionally, President Trump indicated that a 100% tariff on chips and semi-conductors will be imposed, though firms that commit to build in the US will be exempt.
Today, the China trade data (no set time) will be looked at to see if any tariff impacts are showing up, the Bank of England (9pm AEST) is forecast to lower interest rates by 25bps, and weekly US jobless claims (10:30pm AEST) will provide a read on the state of play in the jobs market. On balance, we think that with a September Fed rate cut now almost fully baked in the USD is at risk of bouncing over the next week or so if some important upcoming US data points such as CPI inflation (next Tuesday) and retail sales (next Friday) exceed predictions.
Global event radar: BoE Meeting (Tonight), RBA Meeting (12th Aug), US CPI (12th Aug), US/China Trade Truce (12th Aug), US Retail Sales (15th Aug)
Trans-Tasman Zone
Inline with the softer USD and improvement in risk sentiment over the past few days the AUD and NZD have rebounded. That said, the moves have been rather modest with the AUD (now ~$0.6503) and NZD (now ~$0.5930) only back where they were tracking about a week ago. Indeed, the AUD and NZD are hovering close to their respective 1-year averages. On the crosses it has been a little more mixed with AUD/EUR (now ~0.5576) dipping down towards the bottom of its recent range, while AUD/JPY has nudged higher (now ~95.80) and AUD/NZD (now ~1.0965) has pushed up to the upper end of its 4-month range with the NZD held down somewhat by a softish Q2 NZ jobs report which showed a contraction in employment and uptick in unemployment.
Today, the China trade data is released (no set time), NZ 2-year ahead inflation expectations are out (1pm AEST), and weekly jobless claims are due in the US (10:30pm AEST). On net, as discussed above, although we have a negative medium-term bias for the USD (and positive longer-term AUD view) we feel that over the short-run (i.e. the next week or two) given a September US Fed rate cut is now almost fully priced in there is a chance the USD recovers some recently lost ground if the upcoming US CPI (next Tuesday) shows greater tariff related inflation pressures and/or US retail sales (next Friday) hold up. This could see markets pare back the implied chances of a Fed rate reduction as soon as September. Moreover, on the AUD side, we expect the RBA to deliver further interest rate relief (next Tuesday) and see a chance the Australian jobs report (next Thursday) shows cracks in the labour market are widening. If realised, we believe this could bolster expectations of more RBA rate cuts later in the year, which in turn might drag on the AUD. This would be like past years. As mentioned previously August tends to be a more negative time of the year for the AUD (the AUD has weakened in 21 of the past 28 August’s).
AUD & NZD event radar: BoE Meeting (Tonight), RBA Meeting (12th Aug), US CPI (12th Aug), US/China Trade Truce (12th Aug), AU Jobs (14th Aug), US Retail Sales (15th Aug)
AUD levels to watch (support / resistance): 0.6410, 0.6460 / 0.6530, 0.6580
NZD levels to watch (support / resistance): 0.5840, 0.5900 / 0.5960, 0.6000
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (7th August) CNY Trade Balance (no set time) AUD Trade Balance (June) (11:30am) NZD 2yr Ahead Inf. Expectations (Q3) (1pm) EUR Germany Industrial Production (June) (4pm) EUR ECB’s Rehn Speaks (8pm) GBP Bank of England Decision (9pm) USD Initial Jobless Claims (10:30pm)
FRIDAY (8th August) USD Fed’s Bostic Speaks (12am) CAD Jobs Report (July) (10:30pm)
SATURDAY (9th August) USD Fed’s Musalem Speaks (12:20am) CNY CPI/PPI Inflation (July) (11:30am)
*Note, all times/dates provided are AEST
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