• US jobs. Non-farm payrolls weaker than expected. Some noise in the monthly report. US Fed rate hike pricing pushed back. USD softer. AUD a bit firmer.
• JPY focus. Reports out of Japan indicate officials may move to a less predictable FX intervention strategy. Will they step in during the US holiday?
Global Trends
Ahead of the US’ Independence Day long weekend markets were focused on the latest monthly jobs report. The topline results were generally weaker than predicted with US non-farm payrolls growth slowing to 57,000 in June (its smallest gain since the falls recorded in February), and the previous few months were revised lower. At the same time, on the back of a drop in labour supply (the participation rate declined to 61.5%), the US unemployment rate fell slightly (now 4.2%). There seems to be more noise than signal in the monthly numbers, however on balance we view the results as being a bit more ‘dovish’ for the US Fed. Although the US economy is still generating jobs the run-rate (particularly across ‘cyclical sectors’) isn’t as robust as previously assumed.
In response to the data traders have pushed out the anticipated timing of a US Fed rate hike from October to the December meeting. From there, another rate rise by March is assigned a ~50% chance. The adjustments saw US 2yr bond yields lose ground (-4bps), however, it wasn’t enough to prevent another dip in the US tech sector (NASDAQ -0.8%) with semiconductor stocks on the backfoot due to reports competition across the AI supply chain is intensifying. The repricing in US Fed expectations, and a softer USD helped support gold (+2.3% to US$4139/ounce). The slight moderation in the USD was a function of the moves in US yields as well as reports out of Japan suggesting officials might move away from their usual strategy of ‘jawboning’ ahead of any FX intervention to less predictable action. EUR edged up (now ~$1.1435), as did GBP (now ~$1.3348). The NZD has gained ~0.5% over the pasts 24hrs (now ~$0.5699), and the AUD has ticked up a little (now ~$0.6922).
There is a risk Japanese officials step back into markets to prop up the weak JPY over the period ahead. Previous bouts of FX intervention have been conducted during less liquid holiday markets to try and get more bang for their buck. If it was to occur, given USD/JPY is the second most traded currency, we would expect the USD to come under broad-based downward pressure over the short-run. However, without that, given it is a quiet global data calendar due to the US holiday, market volatility might be subdued.
Trans-Tasman Zone
The softer USD stemming from the weaker than anticipated US jobs report and subsequent adjustment in US interest rate expectations, as well as the firmer JPY on the back of the FX intervention strategy reports has given the NZD and AUD a little boost (see above). That said, at ~$0.5699 the NZD is not that far from the bottom of its multi-month range. It is a similar story for the AUD (now ~$0.6922). On the cross-rates the AUD has been mixed over the past 24hrs. There have been modest gains against CAD (+0.2%) and CNH (+0.3%), while AUD/JPY has slipped back (-0.5% to ~111.50).
As discussed above, given the holiday period in the US and reduced market liquidity, we see a chance Japanese officials wade back into markets to boost the undervalued JPY. If that were to occur, AUD/JPY, which is ‘stretched’ compared to drivers such as relative yield spreads could fall rather sharply. By contrast, given USD/JPY is so highly traded, a pullback could indirectly support the AUD/USD (see chart below).
However, barring another bout of Japanese FX intervention, we expect push-pull forces to keep the AUD contained over the near-term. More broadly, despite the modest adjustments in US Fed rate hike pricing, relative AU-US yield spreads are still suggesting the AUD is facing more headwinds than tailwinds. The RBA looks to be closer to the end than the beginning of its tightening phase (there is only a ~50% chance of another RBA hike priced into the interest rates curve), and the debate around the US Fed is on the timing (not direction) of its next move. This could be compounded by the unfolding slowdown in Australian growth and/or challenges faced by the Asian economy from the prolonged Middle East conflict and disruptions to energy/supply-chains.
