AUD
The Aussie dollar soared last week after the Reserve Bank of Australia sprung a major surprise by holding rates steady at its July policy meeting, defying expectations of both markets and economists. The vote on rates was not unanimous, with six of the nine members of the board in favour of no change, while the other three dissented in support of a cut. While further policy easing remains on the cards in the coming months, the RBA indicated that it wanted to wait for additional confirmation that inflation is converging towards the target level before cutting rates again. We see the decision to hold as merely a matter of timing, with a cut still likely at the next meeting in August, by which time the RBA should have more information on inflation and the trade negotiations. This Thursday’s labour data will also be closely watched by rate-setters, as they monitor whether the trade uncertainty is having any impact on hiring decisions. Barring any surprises here, AUD will probably be driven more by the ongoing trade negotiations this week than domestic factors.
NZD
As expected, the RBNZ held interest rates steady last week in a well telegraphed move by the rate-setting committee. Markets are continuing to largely price in another cut at the bank’s next meeting in August, but governor Hawkseby gave no clear indication that another rate reduction was imminent. His statement largely struck a cautious note, and his remarks largely indicated that further cuts would be dependent on upcoming inflation developments. Yet, with inflationary pressures moderating, and the growth outlook clearly clouded by rising trade barriers, further policy easing appears all but certain. This could keep the New Zealand dollar under pressure in the coming months, and we continue to favour an out-performance in AUD relative to its antipodean counterpart.
USD
Markets seem to be siding so far with chair Powell in its conflict with the Trump administration, and have almost ruled out any chance of a cut in rates at July’s Fed meeting. We look to June inflation on Tuesday to validate the Fed’s stance. Tariff feed through to inflation has been very limited so far, but we doubt this can last forever. Importers will eventually run out of the inventory they accumulated earlier in the year before tariffs hit, and prices should adjust upwards, especially given the background of healthy growth in consumer spending. Meantime, the dollar seems to need some catalyst before it breaks down to lower lows, and a healthy inflation print is unlikely to provide it.
CNY
The yuan continues to cement its legacy as one of the most stable currencies. Unlike most peers, it ended the week almost unchanged versus the broadly stronger US dollar. Trade tensions persist, but Trump’s threat to impose an additional 10% tariff on BRICS countries seems to have fallen on deaf ears, with investors increasingly indifferent to his threats. While most attention is currently focused on the US trade, tensions between China and the EU have also increased, with EC President von der Leyen accusing the country of distorting trade, limiting European firms’ access to the Chinese market and exporting overcapacity. Speaking of the latter, it is worth noting that Chinese producer prices fell in June by the most in nearly two years (3.6%), extending the streak of declines to 33 months. The upside surprise in CPI inflation – the first positive reading after four months of deflation – is hardly a consolation, as there are few real signs of improvement in the data. Looking ahead, there will be plenty to watch beyond trade jitters with the second quarter GDP print and June data bundle scheduled for release this week. The former is set to show softening of activity after a decent expansion in the first quarter.
JPY
The yen was hammered last week after President Trump unveiled that he was planning on slapping Japan with 25% tariffs. Trump remains open to negotiation, but time is running out for both sides to reach a compromise that would sidestep the tougher trade restrictions before 1st August. Any accord would probably need to include a softening in Trump’s stance towards auto imports, a key component of US-Japan trade flows, but this may be difficult as the two sides remain quite far apart. A sharp slowdown in domestic earnings growth also threw shade over the possibility of additional Bank of Japan interest rate hikes last week. Labour cash earnings growth unexpectedly shrank in the year to May to just 1.0% (from 2.0%), after investors had braced for a modest acceleration. This marked both the fourth straight monthly drop, and the weakest reading since March 2024. A BoJ report, which suggested tariff anxiety was widespread in the Japanese economy, further allayed bets in favour of BoJ hikes, and the yen subsequently ended the week as the worst performer in the G10 group.