Australian dollar falls as markets brace for RBA rate cuts | Weekly Update

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5 August 2024

Written by
Ebury

AUD

A surprise to the downside in last week’s Q2 inflation data ensured that the Aussie dollar ended at the bottom of the G10 FX performance tracker. Another rate hike from the Reserve Bank of Australia now appears off the table, with markets back eyeing cuts at some stage before the end of the year, in part due to the global repricing fuelled in the US. We think that this is perhaps an overreaction. Australian inflation remains high, particularly in the core index, and the RBA will likely need to see more concrete signs of disinflation before it pulls the trigger on lower rates. Swaps currently see 50 basis points of cuts by the end of 2024, but we do not think that the RBA will meet these expectations, which could provide some upside for AUD. We look for another moderately hawkish tone from the RBA on Tuesday to confirm our view.

NZD

This Tuesday’s New Zealand labour report for Q2 looks likely to be one of the most important in a while. Markets are currently pricing in not much more than a one in-three chance of a cut from the RBNZ later this month, but a soft set of jobs figures this week could bring an August cut into firmer view. Consensus is for a sharp jump in the unemployment rate to 4.7% from 4.3%, and a drop in employment (-0.3%). We think that any miss to the downside here could ramp up expectations for an August cut, which would likely present a near-term risk for the New Zealand dollar. We continue to eye an underperformance in NZD relative to its Australian counterpart.

USD

The US payrolls report for July was unambiguously weak, with low headline job creation (114k vs. 175k), another increase in the unemployment rate to 4.3%, its highest level since October 2021, and weak wage growth (3.6%). The data seemed to take the Federal Reserve by surprise, as while the FOMC strongly indicated that a September cut was on the way, it gave no hints of an accelerated rate cut timetable following its meeting last week.

We think expectations for cuts, which are now pricing in the equivalent of five full 25bp cuts (125 basis points) for the remainder of 2024, implying a couple of 50 basis point cuts, are an overreaction to what is so far the first weak labour market report of 2024. It does seem clear that in the absence of first-tier data out of the US this week, the dollar may struggle.

JPY

We’ve seen another sharp appreciation in the Japanese yen in the past week, as markets react to the hawkish Bank of Japan announcement and Friday’s payrolls report, which has fuelled safe-haven flows into JPY as investors fear a US recession. The combination of a fastest Fed cutting cycle and a more aggressive BoJ hiking cycle raises the chances of a much sharper narrowing in US-Japan interest rate differentials, which is clearly bullish, and disproportionately so, for the Japanese currency.

Tuesday’s wage growth data will be closely watched by market participants, as this could be important in determining BoJ policy. But, with the yen now back trading around the 142 level on the dollar, there will be far less pressure on the Bank of Japan to continue hiking rates. Indeed, markets now expect rates to stay on hold through year-end.

CNY

Asia FX continues to top the charts amid the unwinding of carry trades, led by the yen. The yuan was among the currencies that rallied the most last week, with the USD/CNY pair now at its lowest level since early-January. While most of this can be attributed to global factors, recent days have brought some interesting domestic headlines. First, China’s Politburo meeting provided shifts in communication that suggest authorities are putting a greater emphasis on allaying economic woes. The pledge to use ‘countercyclical adjustments’ and an emphasis on consumption are particularly noteworthy. Investors welcomed what they saw as a sense of greater urgency that should translate into more policy support. A framework for boosting consumption released over the weekend further supports this notion.

The worsening in US data should provide the PBoC with more room to ease monetary policy, and the help will be needed, with nearly every economic report out of China disappointing expectations of late, notably the composite PMIs. There will be plenty more readings out this week, including trade (Wednesday) and inflation (Friday) before the monthly ‘data dump’ next week. For now, however, the yuan is caught in the global trends and will likely continue to react primarily to outside news.

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