Global Head of Macro Strategy
Summary: The Australian dollar jumped overnight on Australia’s RBA surprising for the second time in a row with a 25-basis point rate hike and guiding for more possible hikes at coming meetings. This has taken AUDUSD to pivotal levels while the US dollar remains firm elsewhere, particularly against the European majors. The coming days and weeks will show us whether the massive incoming US Treasury issuance will support the US dollar via tighter liquidity.
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AUD: yet another surprise hike from the RBA
For the second consecutive meeting, the RBA surprised expectations with another 25 basis point rate hike, taking the cash rate target to 4.1%. The RBA’s statement indicated that while it felt inflation was past its peak, that it would require some time for it to return to the target range and that the move was aimed at increasing confidence that inflation would fall. The statement also noted wage pressures rising (As it began increasing rates last year, much of the RBA focus was on weak wage growth as a reason to take a slow approach to hiking rates), particularly in the public sector. Recent house price rises were also noted and the Bank guided for possible further policy tightening going forward: “some further tightening of monetary policy may be required”. The move sent AUD higher still, but without more support from the commodities market and risk sentiment, the AUD may be nearing its ceiling for now. A weak CNH is also a potential drag as dark clouds continue to dog the Chinese recovery story.
Chart: AUDUSD
We noted on Friday that the AUDUSD threatened a reversal on a move back above the 0.6600 area, which was the important area on the way down to the recent lows, but also noted that a full take-out of the 0.6700 area would be important for “a more emphatic reversal”. The RBA’s surprise hike has the pair poking at this important area, which includes the 0.618 retracement of the recent sell-off in the 0.6680 area and then the 200-day moving average a bit higher. A weak close today would put the pair back in limbo – stay tuned, and worth noting that Australian 2-year yields have already erased about half of the reaction to the surprise hike overnight.
USD: broader picture mixed as liquidity on rising Treasury issuance on watch.
Plenty of confusion for USD traders since it became quite clear that the US debt ceiling would be raised late last week. The brief USD sell-off from mid-last week reversed Friday and the USD firmed a bit more in places today. The data has generally provided a confusing backdrop. Friday’s strong May Nonfarm Payrolls change number of almost +300k plus a strong positive revision of the prior two months’ data was the only positive among many negatives. Among those were pronounced weakness in the household survey that is used to calculated the unemployment rate, which jumped a full 0.3% to reach 3.7% last month without any pick-up in the participation rate. Except for the explosion of the unemployment rate on the pandemic outbreak in early 2020, it would be the sharpest rise in the unemployment rate since 2010 if it holds without a revision. Also disappointing were the slightly weaker than expected average hourly earnings growth, importantly despite another 0.1 drop in the average weekly hours to 34.3. That level matches the range lows for weekly hours since 2011 (not including early 2020 spike). The downtrend in weekly hours suggests weakening labor utilization/rising spare capacity. Then yesterday’s May US ISM Services at 50.3 suggests that the dominant services sector of the US economy is at stall speed at best.
And yet, the incoming US data won’t be much of a focus this week, with the next test the CPI release next Tuesday. Meanwhile, a record pace of treasury issuance as the US Treasury is set to rebuild its reserves will be an important factor to monitor as it will pressure USD liquidity and possibly risk sentiment.
Table: FX Board of G10 and CNH trend evolution and strength.
USD strength remains, but needs refreshment to indicate the greenback remains in a bull trend. Elsewhere, the AUD and CAD are riding tall but the air could be getting thin for both without further boosts in commodity prices and perhaps risk sentiment. The CNH weakness remains quite pronounced and persistent.
Table: FX Board Trend Scoreboard for individual pairs.
AUDUSD is making a bid for a bullish reversal today in the trend, but note the caveats in the chart above. GBPUSD is tilting back lower, really needing to break the low 1.2300’s area to suggest a proper downside break.
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