Currency Markets: Quiet Before the Storm? Labor Day Data and Geopolitical Crosscurrents
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This trading week is shortened in the US by the Labor Day holiday. However, an unusually rich trove of macroeconomic data will be released. The most important will be the August labor market report out of the US on Friday. Strategists have revised down their expectations after July’s very weak report, but these are still consistent with modest job creation and only a small tick in unemployment. The replacement of the head of the organization that compiles the report (the Bureau of Labor Statistics) by a committed Trump loyalist adds another dimension to the uncertainty. The Eurozone August flash inflation report on Tuesday will be the other focus for traders this week.
AUD
The Australian dollar remains well bid, with the AUD/USD pair rising back above the 0.65 level in the second half of last week. The latest RBA meeting minutes signalled further easing ahead, but they have also reinforced the narrative that additional cuts would be both gradual and dependent on incoming data. Importantly, the latest staff forecasts are both consistent with full employment, while also portraying confidence in achieving the inflation mandate. All in all, this is consistent with a pause at the RBA’s September meeting and, at most, only two more rate reductions in the current cycle.
Focus this week will be primarily on Wednesday’s initial estimate of first quarter GDP. Following only very modest growth of 0.2% in the first three months of the year, an acceleration seems likely, with stronger household consumption and a pick up in housing activity seen facilitating a rebound to 0.5% expansion. Thursday’s PMI figures for August are arguably of even greater importance for markets given their timeliness, although these are merely revised figures, so the impact on AUD will likely be muted.
NZD
We saw a modest rebound in the kiwi last week, after the currency was hammered following the surprisingly dovish announcement from the RBNZ earlier in the month. NZD upside may remain somewhat capped by increased rate cut bets, with markets now pricing two additional reductions in the cash rate – a read endorsed by Governor Hawkesby himself in the latest RBNZ meeting. Prime Minister Luxon’s rare comments supporting a 50 basis point rate cut did not seem to impact the NZD, but did raise more than one eyebrow amid heightened concerns about political influence on central banks globally, including the Fed. There is little domestic macroeconomic news on tap this week, so we expect the New Zealand currency to trade largely off developments elsewhere, notably shifts in global risk sentiment.
USD
While last week’s data generally surprised to the upside and painted a picture of a resilient economy, all bets are off before the critical employment report this Friday. A weakening labor market is the only rationale behind the Federal Reserve dovish turn and telegraphing of a September cut, and should data show resilience, such a move may read like the central bank is caving in to relentless pressure from Trump to cut rates. Meanwhile, Lisa Cook’s attempted firing by Trump is likely to be a long legal process. While the short term impact is limited, the message being sent to other Fed governors is unmistakable. Long term rates are the key for Trump, as they drive mortgage rates and hence the housing markets, and these remain stubbornly high even as expectations for rate cuts grow.
CNY
Last week was an interesting one, as USD/CNY broke lower, falling below 7.13 after a strong yuan fixing on Friday. This means that after a long and turbulent period characterised by trade conflict between the US and China, the yuan was allowed to return to levels seen at the time of the US presidential election. It seems increasingly clear to us that Chinese authorities are OK with some yuan appreciation against the dollar, particularly with the currency in trade-weighted terms still close to the weakest levels in recent years.
At 0.5%, the weekly jump in the yuan versus the dollar was substantial, and it will be interesting to see where the PBOC draws the line, particularly if we were to observe subsequent bouts of dollar weakness. In terms of news, trade headlines have been rather immaterial of late, but still bear following. The macro front has been relatively quiet as well – NBS PMIs showed more of the same in August, i.e., more or less flat activity.