Australian dollar jeopardised by growing policy risk

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Forex markets were largely calm on August 4, 2021. The stubborn RBA lifted AUD but everything else stayed the course. DXY was firm as EUR eased:

AUD lifted across the board. There is a base forming in AUD/USD that could be construed as short term bottom:

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Gold and oil sank:

Base metals too:

Big miners didn’t get the memo:

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EM stocks are hanging on for dear life:

Junk improved a little:

The US curve keeps on disappearing:

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Which again aided FAAMGS:

Westpac has the data:

Event Wrap

US factory orders in June rose 1.5%, stronger than the 1.0% expected. May’s 2.1% gain was revised higher to 2.3%. Factory data this year has been strong, although capacity constraints and supply problems remain a headwind. Durable goods orders for June were finalised slightly firmer, with a 0.9% gain (0.8% previously).

FOMC member Daly said she does not expect the labour shortage to persist, expecting people to return to work eventually. Waller said the Fed could favour tapering QE as early as September if the next two jobs reports are as strong as the last one. Alternatively, if the reports are weaker, then tapering will probably be delayed by a couple of months. Brainard has adopted a more cautious approach, wanting to see the data before deciding on the next policy step in September. Bullard wondered whether a new regime had started, of stronger growth and improved productivity, along with higher interest rates and faster inflation. He wants to start tapering soon.

Event Outlook

Australia: Preliminary estimates showed a 1.8% fall in retail sales in the June month, led by a 3.5% drop in Vic and a 2% decline in NSW – both impacted by COVID restrictions. Food retailing rose 1.5%, likely boosted by related stockpiling and expenditure switching effects. All other segments recorded significant declines (WBC f/c -1.8%). Real retail sales look to have posted a modest gain in Q2. Nominal sales are up about 1.3% compared to a 0.1% dip in Q1. The Q2 CPI detail suggests retail prices were a touch firmer but likely up around 0.6% overall. That gives a volume rise of 0.7%qtr. Annual growth will spike to over 9% due to base effects from last year’s COVID lockdown.

New Zealand: We expect June quarter employment to advance 1.0%, which should see the unemployment rate to fall from 4.7% to 4.4%. That’s not quite back to pre-Covid levels, but it is getting close to what we would have considered to be ‘maximum sustainable employment’, even during normal times. We’ve pencilled in a 0.8% increase in the Labour Cost Index for the June quarter, compared to a subdued 0.4% rise last time. That would be a dramatic one-quarter change for what is, by construction, a slow-moving series. But the risks are probably to the upside of this.

Asia: July Nikkei PMIs will be released for Hong Kong and Singapore, and Nikkei services PMIs will be released for China (Caixin) and India.

Euro Area: Retail sales should advance by a robust 1.7% in June, but expenditure will be shifting to leisure and services spending.

US: The market is looking for a 675k rise in June ADP employment, although this remains a poor guide for official payrolls out Friday. The July ISM non-manufacturing survey is set remain around a buoyant read of 60.5, with conditions supported by a switch to services spending. Finally, Vice Chair Clarida will speak at a Peterson Institute Event.

Some fairly hawkish babbling by Fed presidents prevented the RBA’s stubbornness from rocketing AUD. If that persists then we can expect several outcomes:

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  • The yield curve to keep flattening as the Fed chases China into a policy error.
  • Commodities and EMs to crash as the inventory cycle and global growth fade away.
  • DXY to rise strongly and AUD to keep falling.
  • DM equities to correct meaningfully.

Then a panicked backflip by all concerned followed by another round of asset reflation.

The RBA, too, is shifting towards a policy error.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.