Sean Callow, Research Analyst at Westpac, explains that AUD/USD is flat over the past week, after trading a range of only about 1.2 cents, the narrowest weekly range since early April, but is showing signs of strength against other currencies, with its fundamental support looking more solid.
Key Quotes
“We heard plenty from the RBA last week. Westpac continues to expect a steady cash rate through both 2018 and 2019 and the wages and unemployment data left us even more comfortable with that view. In Q1, wages grew less than expected, up just 0.5%qtr and remained at 2.1%yr. Private sector wages growth stayed at a mere 1.9%. And while the 23,000 increase in April employment was decent enough, an increase in labour force participation meant that the unemployment rate rose from 5.5% to 5.6%.”
“Governor Lowe has said that unless wages growth accelerates, it is difficult to see the RBA hitting its inflation target of 2 to 3%.”
“Neither the RBA nor government expects unemployment to fall to 5%, let alone below.”
“Such an outlook reinforces the case against higher interest rates in Australia, with markets pricing only about a 15% chance of a rate rise by end-2018. This means yield differentials continue to favour the US dollar. Over the past week we saw the US 10 year Treasury bond yield reach highs since 2011, above 3.1%. If this continues in the months ahead, it will limit any Aussie dollar rallies against the greenback.”
“But the Aussie has performed better against currencies such as the kiwi and euro over the past week or so.”
“The kiwi meanwhile continues to suffer from the RBNZ’s warning that the next move on interest rates is evenly balanced between up or down – a clear contrast with the RBA. AUD/NZD last week rose above 1.0900 for the first time since February.”
“Commodity prices are also somewhat helpful for the Aussie, with Australia’s export basket reaching 2 month highs before pulling back slightly on Friday. In the week ahead, a quiet local calendar leaves AUD to be driven by global factors. Sunday’s declaration by US Treasury Secretary Mnuchin that the US-China trade war is “on hold” is a welcome boost to risk appetite that should help equities and AUD.”
“If commodities remain supported and equity volatility stays low, AUD/USD should push towards 0.7575-0.7600 this week, finding support on dips to around 0.7450. In this scenario, the Aussie should make more notable gains on most cross rates, especially NZD and EUR.”
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