AUD Gains as RBA Remains Cautious | Weekly Update

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2 September 2024

Written by
Ebury

AUD

Last month was a particularly good one for the Australian dollar, which was one of the better performers in the G10. Sticky inflation and a reasonably solid growth performance suggest that the Reserve Bank of Australia may adopt a more gradual approach to cuts than its peers, with the latest meeting minutes suggesting that one was unlikely soon. Markets, however, now now see a first rate reduction by year-end as more likely than not, which we think is overly aggressive.

Attention this week will be on communications from RBA governor Bullock, who will be speaking on two occasions on Thursday. We expect her to once again rule out a near-term rate cut, while emphasising upside risks to inflation. In the meantime, revised August PMI figures and the Q2 GDP report (both on Wednesday) could be market movers. Economists expect the latter to show a mild acceleration in growth relative to the near flat expansion from Q1.

USD

For all the fretting about a US slowdown, most economic indicators continue to be consistent with steady growth and a solid performance of the labour market, cementing our stance that a recession is not in the offing anytime soon. We are paying particularly close attention to the weekly jobless claims indicator, and it continues to bounce around near all time lows relative to the size of the US labour force. Second-quarter GDP growth was revised higher last week on stronger consumer spending, though this is admittedly a lagging data point.

The key test comes this Friday as the August labour report is due to come out. Markets are pricing in about a one-third chance of a 50bp cut from the Fed at its September meeting (18/09), but we think this is too much and expect that a solid NFP print will confirm our view. Another sizable downside surprise, however, could raise expectations for a bumper cut, and would almost certainly trigger fresh downside in the US currency.

NZD

As mentioned, the New Zealand dollar was the only currency in the G10 to rally against the US dollar last week, ending nearly 1% higher. Indeed, August was a very good one for NZD, with the high-beta currency performing particularly well in an environment of easing bets in favour of lower Federal Reserve rates.

The Reserve Bank of New Zealand delivered a surprise rate cut in August, however, and with further aggressive cuts on the cards, we think that a near-term retracement could be in the offing. At its August meeting, the RBNZ sharply lowered its expected path for rates to 3.85% by the end of 2025, down from 5.14% at its May meeting. Traders think that even this may be conservative, with swaps currently pricing in more than 200bps of cuts to around 3.2% through to the end of next year.

CNY

The yuan’s rally continued last week, with the USD/CNY exchange rate falling below the 7.10 mark for the first time this year, while also sliding to its lowest position since June 2023. With investors now smelling rate cuts in the US, Asia FX can finally catch a breath. That said, domestic news has not been particularly encouraging of late, and further gloom could cap gains in the region’s currencies.

China’s PMIs are flattening, and the property market slump has extended despite stimulative efforts from the country’s authorities. The country’s economic surprise index from Citibank has fallen since April, declining to its lowest level in almost a year last month. This week’s important release will be Caixin services PMI, out on Wednesday, which will close out the business activity calendar for August.

JPY

The recovery in the Japanese currency almost completely lost steam in August, with the USD/JPY pair spending much of the month within a narrow range, at a time when every other G10 currency posted solid gains on the dollar. But, the outlook for the yen is far from devoid of optimism, particularly as BoJ governor Ueda suggested last month that recent market volatility would not derail plans for higher rates. This hawkish stance was reinforced by Friday’s Tokyo CPI data, which showed an uptick in both the main and core inflation rates.

The Bank of Japan is not seen raising rates again at its September meeting (20/09), although Ueda could hint at another hike by year-end should data in the interim warrant further action. This includes the July wage growth (Thursday), second quarter GDP (09/09) and August inflation data (20/09).

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