Market Briefing: USD doldrums
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack.
US trends. Soft US producer prices, rising jobless claims, & trade uncertainty weighed on yields & USD. AUD near top of its recent range.
Market pricing. USD has fallen a long way. Has too much negativity been factored in? US retail sales & Fed meeting in focus next week.
AUD & NZD. Weaker USD has supported NZD & AUD. AU jobs report due next week. Will the AUD's upswing pause for breath?
Global Trends
Macro forces and lingering trade concerns have combined to weigh on US bond yields and the USD. Data wise, after yesterday’s soft US CPI report, producer prices were also weaker than predicted. The core PPI increased by just 0.1%. This lowered the annual pulse to 3%pa, the slowest since August 2024 with tariff effects on ‘goods’ more than offset by disinflation across larger ‘services’ categories. Added to that recurring applications for US unemployment benefits rose to the highest level since late-2021, an indication the uncertainty and stepdown in growth is spilling into the jobs market. On the trade-front President Trump stated the US will notify its trading partners of their unilateral levy rates within two weeks, reigniting worries about the outlook.
These factors coupled with solid demand at the latest US bond auction saw yields decline. The US 10yr shed ~6bps (now ~4.36%) with the policy expectations driven 2yr yield falling ~4bps (now ~3.91%). Markets are discounting the US Fed to re-start its interest rate cutting cycle in September with 3 reductions baked in by March. Elsewhere, the S&P500 rebounded from a weaker open to end the day in positive territory (+0.4%). And the step down in US rates saw the USD depreciate. EUR (the major US alternative) extended its uptrend and touched its highest point since Q4 2021 (now ~$1.1588), GBP shrugged off a negative monthly UK GDP surprise to be at the top of its cyclical range (now ~$1.3618), and USD/JPY drifted lower (now ~143.50). The backdrop supported the NZD (now ~$0.6069, the upper end of its 8-month range) and the AUD (now ~$0.6533, near levels last traded in late-November).
As our chart shows, the USD index has lost quite a bit of ground since President Trump’s mid-January inauguration and is currently below where our ‘fair value’ model suggests it should be. In our mind, this means a lot of negatives may already be factored in. US retail sales are due next week and the US Fed holds its policy meeting. In our view, signs US consumer spending is holding up and/or no strong signals that the US Fed is close to easing policy might give the beleaguered USD a temporary boost. That said, we don’t think any turn around in the USD will last too long or go too far. Underlying fundamentals are turning against the USD, in our opinion, and we believe the USD should trend lower over the medium-term.
Global event radar: China Data (16th June), Bank of Japan (17th June), US Retail Sales (17th June), US Fed (19th June), Bank of England (19th June)
Trans-Tasman Zone
The softer USD stemming from the downshift in bond yields on the back of subdued US price pressures, widening cracks in the jobs market, and lingering policy uncertainty has given the NZD and AUD a boost (see above). At ~$0.6069 the NZD is near the top of the range it has occupied since mid-October, while the AUD (now ~$0.6533) is at the upper end of the range it has traded in since late-November. That said, in a sign of how USD centric the moves have been the AUD has weakened against the EUR (-0.3%), JPY (-0.2%) and the NZD (-0.2%).
Both the AUD and NZD have snapped back aggressively over the past few months. Due in large part to the USD downturn the NZD and AUD are ~10.5% above their respective post US ‘Liberation Day’ April lows. After such a strong run we wouldn’t be surprised to see the NZD and AUD give back a little ground of the near-term. As mentioned above, next week US retail sales are due and the US Fed holds its latest policy meeting, while in Australia the monthly jobs report is released. We think there are risks the beaten down USD can bounce back a bit if the US data surprises and/or the US Fed leans against ‘dovish’ expectations looking for a rate cut over the next few meetings. At the same time, after a strong result in April payback in the volatile Australian labour market report in May is also possible. In our opinion, this type of mix may take some heat out of the AUD over the short-run.
However, barring an exogenous shock we don’t believe retracements in the AUD should be overly pronounced. We remain of the view that the various Trump Administrations policies will act to constrain US growth and/or dampen investor confidence in holding US financial assets over the medium-term. In time we believe this backdrop could see the USD steadily weaken, and this can help the AUD push higher over the coming year. Also helpful for the AUD’s longer-term outlook are steps being taken by authorities in China to counter export sector headwinds via boosting domestic activity, particularly commodity intensive infrastructure investment.
AUD & NZD event radar: China Data (16th June), Bank of Japan (17th June), US Retail Sales (17th June), US Fed (19th June), NZ GDP (19th June), AU Jobs (19th June), Bank of England (19th June)
AUD levels to watch (support / resistance): 0.6420, 0.6490 / 0.6550, 0.6590
NZD levels to watch (support / resistance): 0.5970, 0.6020 / 0.6080, 0.6120
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (13th June) EUR Industrial Production (Apr) (7pm)
SATURDAY (14th June) USD Uni. of Michigan Sentiment (June P) (12am)
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