Busy calendars in the US, the EU and Asia will keep markets on their toes this week. In the US, further evidence that the recovery is continuing at a solid pace would be welcomed by Wall Street, where more fresh record highs were recorded last week. In the EU, the data will be closely monitored for any drag from the run-up in infections that has accompanied the holiday travel season. Asia has the usual month-end deluge from Japan and the timely PMIs from China, with activity in the former seen as sluggish while markets will look for additional signs that China is further out on the recovery curve relative to the US, EU and Japan. UK markets are closed Monday for a bank holiday.
Australia’s RBA meeting is the very first highlight of a busy calendar. The RBA is expected to hold rates steady at 0.25%. The views widely remain that the policy rate will be held at the current level for an extended time, likely through at least 2021, as the RBA joins the core central banks in keeping policy very accommodative to support the economy. Further stimulative measures remain a possibility if deemed necessary, such as a rate cut to 0.10% or perhaps the adoption of QE to reduce long term rates.
As for economic data, the Q2 GDP report (Wednesday) is expected to reveal a -8.0% plunge (q/q, sa) after the -0.3% dip in Q1. A big drop in GDP is widely expected given the shutdown early in the quarter to control the spread of the virus. The Q2 current account and September building approvals are due out Tuesday. The trade report (Thursday) is projected to reveal a narrowing to A$5.0 bln in the July surplus from the A$8.2 bln surplus in June. Retail sales (Friday) are anticipated to rise 3.0% in July after the 2.7% improvement in June.
In regards to the currency market, the Aussie is the biggest gainer in the softening US dollar environment out of the main currencies we keep tabs on, showing an advance of 1.1% with regard to the former, and 1.3% with regard to the less liquid latter, although a little off their respective highs. Along with Kiwi they are marginally beating the Yen into third spot on the biggest winners table. The Japanese currency was catapulted high on a safe-haven bid following news of Japanese PM Abe’s resignation (creating political uncertainty and marking the end of Abenomics), which catalysed a sharp drop in Japanese stock markets.
The antipodean currencies, meanwhile, have been buoyed indirectly by the Fed’s framework regime shift. AUDUSD is trading at levels last seen in December 2018, making a high so far of 0.7350. Last week’s 2.5% gain marks a re-acceleration in the pair’s five-month rally, which has lifted the pair by nearly 33.5% from the March nadir, which has more than reversed the heavy losses that were seen as the pandemic and consequential global lockdowns sparked a panic in global markets.
Trend following has been in play, which seems likely to remain the case, although the Aussie can no longer be labelled as cheap relative to the greenback.
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Andria Pichidi
Market Analyst
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