Currency View by OFX

Last week’s news

• There was ambiguity after the release of the Fed minutes in the US. Fed staff are projecting inflation to move back below 2% next year. However, some Fed officials are getting nervous about the transitory status of inflation as supply-chain stress and wages upside pressure flow into prices. The Fed minutes showed some division on whether to taper mortgage-backed securities purchases faster than treasuries or diminish the purchases of both proportionately. One clear takeaway was that Fed officials might want to start tapering asset purchases sooner than expected.
• The Canadian labour market had a strong recovery in June, which might support a third-quarter bounce in economic activity. A strong recovery in job postings on Indeed Canada and increasing vaccination rates suggest progress might come quicker than anticipated. The net change in employment was 231k, higher than the consensus expectation of 175k. However, according to Bloomberg, the remaining job deficit to the pre-COVID trend is a better gauge of slack. This gap may be as high as 750k and increasing, which may impact the rate normalisation path for the BoC.
• The ECB announced the results of its latest strategy review adopting a 2% inflation target over the medium-term, an average inflation targeting but one that has stopped following the US Fed. The decision was very much expected and moves away from their previous inflation targeting of ‘below but close to 2%’. ECB President Christine Lagarde said, ‘…the new strategy is a strong foundation that will guide us in the conduct of monetary policy in the years to come.’
• The RBA’s announcement last Tuesday was largely within expectation as it pared-back extension of its QE program and expects to keep interest rates the same for at least another 2.5 years. The 3-year yield target has been rolled back to Nov 2024 from the previous April 2024 target. Governor Lowe stated that the bank will continue to purchase bonds given ‘we remain some distance from the inflation and employment objective’, further adding ‘will not increase the cash rate until actual inflation is sustainably within the 2-3% target range’ with the bank’s central scenario for that to happen at least in 2024.
• The Delta outbreak continues to spread in Sydney, forcing it to extend its current lockdown and increase restrictions. The vaccination rollout has remained sluggish as the nation has only administered enough doses to cover an estimate of 16.5% of the population, compared to those of the US (51.7%) and the UK (59.4%). Uncertainty remains on when these lockdown restrictions will end, which continues to weigh on the Australian dollar as risk appetite plummets.

Looking ahead

• With a selective rally of the USD last week especially against commodity currencies such as the CAD, AUD, and NZD, market participants are evaluating if the disconnection from strong equity markets (the Dow Jones, Nasdaq and S&P increased 0.68%, 1.24%, and 1.15% over the last week) will continue this week.
• Haven currencies are performing strongly as combined worries about central bank tapering and a rise in virus count undercut risk appetite. Gold also picked up and hit a weekly high on Friday as global bond yields slide. The S&P had a volatile week, but managed to print a 1% rally to all-time highs on Friday.
• The AUD was affected by the lockdown extension, as the Delta variant showing no sign of slowing. The RBA has stated that the continuation of stimulus and interest rates no likely to rise until 2024. Despite this, the AUD and NZD closed higher on Friday on an intraday reversal after the AUD touched a new low of the year at 0.7410.

Key market events this week

• Tuesday
  • US CPI
  • China Trade data
• Wednesday
  
  • Rate decision in NZ and Canada
  • UK CPI
  • US PPI and Fed Beige Book
• Thursday
  • China GDP
  • Australia, UK and US unemployment and initial jobless claims
• Friday
  • Eurozone and NZ CPI
  • Eurozone Trade data
  • Japan rate decision
  • US retail sales data