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Aussie Rebounds from 7 Week Lows

The Aussie is net little changed over the week, but only after substantial volatility, including 7 week lows. Australia’s strong GDP report and changed RBA language had less impact than the US dollar’s gyrations. AUD/EUR may be the key cross rate to watch this week as the ECB meeting looms.

Aussie rebounds from 7 week lows

The Aussie is net little changed over the week, but only after substantial volatility on Thursday and Friday. On Thursday, AUD/USD ended a run of 16 consecutive days of closing with a 0.77 handle, sliding to a 0.7658 close amid a broad wave of US dollar gains.

There was no obvious fundamental driver for the US dollar rally and its timing was rather ill-advised, just a day before the US May employment report, the final such update on the US labour market before the FOMC’s 15-16 June policy meeting. Once again this report had a big impact on markets. Non-farm payrolls rose 559k in May after 278k in April. These of course are very large numbers but still leave total payrolls 7.6 million below the February 2020 peak. The unemployment rate fell to 5.8% versus 3.5% pre-pandemic.

In response, the US 10 year Treasury bond yield dropped from 1.63% to 1.55% and equities looked on the bright side of the presumed Fed outlook, rallying to just short of record highs. The US dollar’s slide sparked a revival in the Aussie to 0.7740, the sharpest reaction of all G10 currencies on Friday.

Australia’s domestic developments were also seen as positive for the Aussie, though of course not enough to prevent 7 week lows on Thursday. The RBA was on hold as expected, keeping the cash rate and the 3 year bond target yield at 0.1% and continuing its current $100bn bond purchase program. It repeated that the labour market was unlikely to be tight enough to drive wages growth consistent with on-target inflation “until 2024 at the earliest.”

But while much of the statement was familiar, the RBA drew attention by removing a sentence about being “prepared to undertake further bond purchases.” This may have been just a tidy-up of the verbose May statement but many saw it as a hint that enthusiasm for another $100bn in QE has waned. We may not get any clarity on this until the 15 June minutes or 17 June speech by Governor Lowe in Toowoomba.

Australia’s GDP report was an unalloyed positive however, jumping 1.8% vs consensus 1.5%, with private investment rather than government spending leading the way. This reinforces the upbeat RBA/Govt narrative even with Victoria’s lockdown extending another week. The calendar in the week ahead is less dramatic, though it will be interesting to see Australian consumers’ response to the situation in Victoria.

Meanwhile, the Aussie’s commodity price support has strengthened once again, with Westpac’s index of Australia’s commodity export prices up 4.4% over the week. Spot iron ore prices rebounded to $208/tonne while the price of coal used for steel production has risen steeply.

In terms of potential movement on AUD cross rates, AUD/EUR looks to be most at risk this week. At Thursday’s meeting the ECB will weigh up the positives of Europe’s much improved vaccination rollout, growing fiscal support and elevated business confidence against the lingering upward pressure on bond yields in e.g. Italy and Portugal. While there is no expectation of a change to the overall scale of the QE program, consensus has moved back towards the ECB maintaining a faster pace of bond purchases for now, at EUR85bn per month. But with new forecasts to be released and the euro sensitive to comments at President Lagarde’s press conference, there is plenty of scope for volatility – especially just ahead of the release of US inflation data.

Event risk this week

China May trade balance, NZ holiday (Mon), Aust May NAB business confidence, Germany May ZEW investor expectations (Tue), Aust June Westpac Australia consumer sentiment, Aust weekly payrolls to 22 May, RBA’s Kent speaks, China May CPI (Wed), ECB policy decision, US May CPI (Thu), US June University of Michigan consumer sentiment (Fri)

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