USD and AUD/USD
Economic data out of the U.S. this week include the second estimate of U.S. Q2 real GDP. The first estimate of U.S. Q2 GDP fell -0.9% (saar), making it the second consecutive negative quarter of growth (after a -1.6% (saar) in Q1). This placed the U.S. economy in a technical recession, even though the current historical low in the U.S. unemployment rate of 3.6% would suggest otherwise.
While the U.S. economy is slowing, the slowdown is modest. Household balance sheets are very strong, assisted by large cash reserves accumulated through the pandemic. It will take some time for the high interest rates to materially slow the U.S. labour market. But there are some early signs of that occurring with many large firms reporting reducing hiring or imposing hiring freezes. Weekly jobless claims also continue to trend higher, as they have done since the FOMC’s first rate rise in mid-March.
The message from FOMC member speakers is that, despite the mild slowdown in the U.S. economy, they will press-on with interest rate rises to get inflation under control. Debate continues as to whether the next FOMC meeting on 21 September will be a 50bpt rate rise or a 75bpts rate rise. The OIS interest rate market is currently pricing a 58bpts rate rise, implying a 77% chance of a 75bpt rate rise.
Assessing the USD against the other two major regional currencies, EUR and CNH, leaves the USD the preferred currency of choice. The prospect of a resilient U.S. economy, with further large rate rises coming, stands in contrast to Europe’s concerns over energy shortages, inflation, and relatively lower terminal interest rates compared to the U.S.
It also stands in contrast to China’s persistent restrictive policies towards covid, which are significantly impacting the economy at a time when the Chinese property market is under large stress. Furthermore, in direct contrast to the Fed, the PBoC cut the benchmark one-year Medium-Term Lending rate last week by 10bpt to 2.75%. There is likely to be a follow-up rate cut to China’s Loan Prime Rate this week.
The USD index (DXY) further appreciated last week. It appears set to further lift and re-test its 14 July high of 109.29 as the above economic contrasts persist.
Further strength in the USD, will keep AUD/USD under some downward pressure. There is limited Australian economic data out this week to change the levels in AUD from a domestic perspective. Australian exporters will be buying the dip in AUD. However, the appreciation strength in USD is likely to dominate.
As indicated last week, AUD/USD may have some trouble lifting above the 200-day moving average of 0.7142, and indeed it did, with AUD/USD trending lower all week, to trade below its previous August low. Some modest technical support for AUD may be found down around 0.6770.
AUD/EUR Despite Europe desperately lifting their gas storage levels before the onset of the European winter, it has been revealed by Germany’s Federal Network Agency (the country’s energy regulator) that if Russia completely cut off its (already-reduced) gas supply to Europe, then Germany would run out of gas within three-months. And that is the case even if Europe’s gas storage levels lift from their current level of 77% capacity, to be 95% full.
Over the course of last week, EUR/USD came under renewed downward pressure, as gas prices lifted towards their record highs of 9.752 MMbtu once these European energy concerns began to be absorbed by market participants.
Gas restrictions in Europe will significantly slow economic activity because they result in reduced factory output and real household spending power. AUD/EUR will continue to remain well supported. Particularly with EUR/USD closing last week on its low at 1.0037. Almost certainly, EUR/USD will trade below parity to the USD again, and if so, retest the previous 14 July low of 0.9952.
AUD/EUR pulled back from its last week’s high of 0.6946 after Australia’s July labour market data showed a fall in employment growth, the first in nine months. However, the Australian Bureau of Statistics revealed the main reason for the fall in total employment was because the July reference period (when the employment survey was undertaken by the ABS) coincided with the winter school holidays, worker absences associated with COVID and other illnesses, and further flooding events in New South Wales.
In other words, it doesn’t appear that recent economic developments will result in large downward pressure on AUD/EUR. Good support for AUD/EUR is likely to be found around 0.6800.