Generally strong economic data last week lead markets to start pricing out some Fed cuts.Spending remains healthy and consistent with decent growth, in spite of the slowing labor market. With little sign of economic acceleration across the Atlantic the resulting rise in US rates was enough to push the dollar higher against all major currencies. The upcoming ruling on the legality of Trump's firing of Fed Governor Cook, and its implications for Federal Reserve independence, remain a tail risk for the greenback, but for now the main alternative to the US dollar appears to be not a different currency but gold, which continues to make record highs every week.This week the focus should have been on the all important US September labor market report on Friday, but once again Us politics may steal the spotlight. A potential US Federal budget shutdown if the October 1st deadline for a funding bill is breached may result in the delay of the report's release.
AUD
Last week, the aussie dollar reached a three-year high against its antipodean counterpart, driven by a hotter-than-expected headline inflation figure. The monthly CPI indicator - which the RBA reiterated is subject to volatility and doesn’t provide a clean signal - rose to 3%, surpassing expectations of a 0.1 percentage point increase. Still, markets were quick to trim their expectations for rate cuts ahead of this week’s interest rate decision, which is expected to remain unchanged. As to the November meeting, it remains a coin toss, with inflationary pressures seemingly reaccelerating and the labour market having mildly weakened since the last monetary policy decision. Beyond Tuesday’s rate decision, Thursday’s trade balance figures will be closely monitored, following July’s solid surplus.
NZD
The kiwi continued to underperform the Australian dollar last week and is now trading at its lowest level against the greenback since mid-April. The week’s highlight was the appointment of Dr. Anna Bremman as the new RBNZ governor on Wednesday. Dr. Bremman, currently the First Deputy Governor at Sweden’s Riksbank, is regarded as a rather dovish policymaker based on her tenure at the Swedish central bank. However, the market's response to her appointment was largely subdued. By the time she begins her five-year term on December 1, market pricing suggests the RBNZ will have implemented nearly 75 basis points of rate cuts, with a 10% probability of a 50-basis-point reduction next week, as it nears the end of the cycle. With little on the economic calendar this week, attention is focused on the RBNZ’s October meeting, where further monetary easing is widely expected to prevent a double-dip recession.
USD
Second-quarter GDP growth was revised higher, and home sales, durable goods orders and personal income and spending all came out stronger than expected. The US economy seems to be growing at a steady rate even while the job market creates few jobs, a sign that the employment slowdown has more to do with labor supply (lowered by the immigration crackdown and demographics) than a faltering economy. A spate of labor market reports culminating in the September payrolls number Friday will add further clarity to the state of the US labor market, but the likely lack of a bipartisan accord to increase the debt limit may interfere with economic releases out of the US, further adding to the sense of political chaos and institutional degradation
CNY
Some firmness in the US dollar allowed for a small upward shift in USD/CNY last week. Domestic economic news was scarce – data-wise, attention was on industrial profits, which shifted to grow in August. It is an encouraging sign as this is what is expected of a healthy economy – perhaps authorities' campaign to curb aggressive price competition is having some impact. This week, attention turns to PMIs, with both NBS and RatingDog data out on Tuesday. Aside from that, we will keep an eye on China’s holiday spending, with Golden Week kicking off on Wednesday.
JPY
The yen sold off last week, with USD/JPY almost touching the 150 mark. While a fair portion of the move can be attributed to the dollar’s strength, domestic news wasn’t particularly supportive. Business activity PMIs disappointed in August, with the composite index falling to the lowest level since May (51.1). Moreover, Tokyo inflation stabilised at 2.5%, pointing to noticeably softer price pressures in the capital than expected. This will surely play a role in the BoJ’s deliberations, but the October cut still seems very much in play. Given the above, and more broadly the divergence between the Fed’s and BoJ’s stances, in our view, the yen’s prospects still look quite favourable despite the recent depreciation pressure.
