• Mixed markets. Equities slipped back & USD ticked up overnight. AUD & NZD remain on the backfoot. JPY weaker after some BoJ comments.
• US data. US jobs report out tonight. There has been a tendency for non-farm payrolls to exceed analyst forecasts the past few months. Will this continue?
• AUD trends. The unfolding pull-back in the AUD isn’t unusual at this time of year. Late-July/August is typically a negative period for the AUD.
Global Trends
Mixed fortunes across markets overnight with US and European equities slipping back, bond yields consolidating, and the USD ticking up a bit further. The S&P500 (-0.4%) ended the session modestly lower after touching a fresh intra-day record. Despite the pockets of volatility and headline noise the S&P500 posted its 3rd straight monthly gain in July (+2.2%) to now be almost 31% above its early-April panic sell-off low. The looming self-imposed US trade deadline, which will see the ‘pause’ on reciprocal tariffs expire in a few hours, weighed a little on investors’ minds, particularly as many nations haven’t reached a deal and the levies imposed on those that have are still quite high. One relative bright spot was the news Mexico won a reprieve from the planned 30% tariff rate for another 90-days.
In FX, the USD was propped up by a weaker JPY which was weighed down by comments from Bank of Japan Governor Ueda who dashed hopes of a near-term interest rate rise. According to the Governor “right now, the risk of falling behind the curve is not that high” and “the Yen isn’t deviating a lot from the BoJ’s view”. USD/JPY has risen to ~150.75, the top of its 4-month range, with solid US economic data also helping the USD. US weekly initial jobless claims remain low, while the uptick in the employment cost index and core PCE deflator (the Fed’s preferred inflation gauge) indicate there are lingering price pressures in the system. The firm USD, wobbly risk sentiment, and a soggy set of China business PMIs (especially the manufacturing index which remained in ‘contractionary’ territory) has seen the NZD (now ~$0.5890) and AUD (now ~$0.6425) extend their respective moves lower.
Heading into the end of the week, US trade tariff news and the monthly US jobs report (10:30pm AEST) will be in the driver’s seat. In terms of the data, various leading indicators suggest US labour market conditions are cooling on the back of the building growth headwinds. That said, as our chart shows, there has been a tendency for US non-farm payrolls to exceed downbeat consensus forecasts over the past few months. Market analysts are looking for non-farm payrolls to slow to just 104,000 in July, and for the unemployment rate to nudge up to 4.2%. In our opinion, another positive surprise in the US jobs report could generate knee-jerk support for the USD which continues to track below our ‘fair value’ estimate even after accounting for its recent rebound. The increase in the USD index in July was its first monthly gain since last December.
Trans-Tasman Zone
The combination of a firmer USD, stemming indirectly from a weaker JPY, shaky risk sentiment, and softer than expected China business PMIs have kept the NZD and AUD on the backfoot (see above). At ~$0.5890 the NZD is under its 1-year average and around the lower end of its 3-month range, while the AUD (now ~$0.6425) is hovering near its 100-day moving average, a technical momentum indicator it hasn’t been below since early-April. The AUD’s performance on the crosses has been more mixed. AUD/JPY has pushed higher (+0.6%) thanks to the broad-based pull-back in the JPY, while the AUD has shed ~0.1-0.3% versus the EUR, NZD, and CNH over the past 24hrs.
There are no major economic releases in Australia today. The AUD will be driven by USD trends. As mentioned above, US tariff related news and the monthly US jobs report (10:30pm AEST) will be in the spotlight. And in our judgement, we think there is a risk renewed tariff related jitters continue to sap investor confidence and/or the US employment data exceeds rather downbeat forecasts. As the chart above illustrates, over the past few months US non-farm payrolls have tended to come in above analyst’s expectations. If this comes through again in the July data we think the USD might garner more support, which in turn may exert further downward pressure on the AUD and NZD.
Over the past few weeks we have repeatedly warned about the AUD’s negative seasonal tendencies in late-July/August. As mentioned previously the AUD has weakened in 21 of the past 28 August’s. We believe this pattern might be unfolding again in 2025, particularly as we feel the USD (which is trading below our ‘fair value’ estimate) has scope to rebound further (see above). From our perspective, the prospect of a RBA rate cut on 12 August and messaging there could be more to come, combined with a continued run of positive US data surprises, bursts of tariff-related volatility, and/or seasonal USD strength could see the AUD slip back even more over the period ahead.
