Thursday, March 22, 2018
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AUD/USD should struggle to retain the 0.78 handle – Westpac
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Sean Callow, Research Analyst at Westpac, notes that AUD outperformed last week thanks to improved global risk sentiment, both around North Korea and the US employment report. But if Australia’s key commodity prices continue to weaken, AUD/USD should struggle to retain the 0.78 handle in the week ahead, he further adds.

Key Quotes

“The ‘dollar bloc’ currencies – AUD, NZD and CAD – have outperformed over the past week, rising about 1%. Australia of course had a very busy calendar, including the RBA meeting, a speech by Governor Lowe, Australian data on GDP, retail sales, trade balance and building approvals. Yet the sharpest moves in AUD/USD were in response to (a) South Korea’s upbeat report on its meeting with North Korea and (b) the US employment report.”

“The Aussie doesn’t normally pay much attention to Korean political developments so there’s no guarantee that e.g. the proposed Trump-Kim meeting will be important for AUD. But North Korea’s pledge to refrain from protesting annual South Korea-US military drills was one factor that helped global equities rise 2.9% last week (MSCI World Index). Such optimism is often supportive of AUD.   As for the US employment data, non-farm payrolls surged 313k in February, the strongest reading since July 2016.”

“Unemployment was steady at 4.1%, as a flood of people entered the labour force. But average hourly earnings surprised on the downside, rising a modest 0.1% m/m, trimming the annual pace to just 2.6%, from a revised 2.8% in Jan. Recall that the original print of 2.9% in Jan was the strongest since 2009, sparking much discussion of how the tight labour market was finally producing significant wage acceleration and how this meant the Fed would need to raise rates faster.”

“So the debate over the degree of inflation threat from the US’s tight job market will continue. But overall, equity markets seem to have focused on the soft wages reading which implies wider profit margins and a less steep path for US interest rates. The 1.7% jump in the S&P 500 Friday helped AUD/USD start this week above 0.7850, a high since 27 February.”

“Yet there are reasons to question the sustainability of this rally. Australia has escaped the direct impact of the US’s steel and aluminium tariffs which take effect 23 March but we are yet to see how other nations and trading blocs respond. And when the US reports ongoing gaping trade deficits in coming months, will the White House announce more tariffs?”

“Moreover, AUD’s commodity price support has softened in recent days. Led by iron ore, Westpac’s basket of Australia’s key export commodity prices fell 2% last week, to a low since mid-December. This suggests that AUD/USD will need global equity markets to remain upbeat in order to sustain trade above 0.7800 over the week.”

“Australia’s data calendar is worth noting but seems very unlikely to be pivotal for markets. The RBA has been happy to point out the strength of business confidence and there’s no reason to expect a radical change in Feb.”

“In the US, CPI and retail sales are probably the key releases. Interest rate markets imply that a rate hike at next week’s Fed policy meeting is effectively a done deal, but if there are major surprises in this week’s data, it could impact the outlook for meetings beyond March.”

“All this suggests that AUD/USD struggles to find new buyers in the 0.7850-0.7900 zone, with risks back to 0.7750 if commodity prices remain under pressure.”

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