5th July 2021 - AUD/USD may benefit from commodities short covering, softer greenback

Good Morning,

Market Headlines

The dollar retreated on Friday amid risk-appetite. However, it closed the week with gains against most of its major rivals. The monthly employment report showed that the US added 860,000 new jobs in June, but also that the unemployment rate ticked higher to 5.9%. Equity market sentiment remained upbeat, the S&P500 up 1.2% to a fresh three-month high and within 5% of the record high made in February. Risky currencies followed suit. Government stimulus and recovery expectations remain the main drivers of sentiment. US 2yr treasury yields rose from 0.20% to 0.23%, while the 10yr yield fell from 0.93% to 0.87%.

Commodities, Brent crude oil futures fell 3.5% to $40.80 after making a fresh three-month high, hurt by Saudi Arabia’s intention to cease production cuts from July, copper rose 1.1% to a three-month high, iron ore rose 5.1% to $105.65 – a 10-month high, and gold rose 0.8%.

Overnight Currency Ranges

AUD/USD 0.7445 0.7533

EUR/USD 1.1807 1.1874

GBP/USD 1.3733 1.3844

USD/JPY 110.95 111.66

NZD/USD 0.6947 0.7036

USD/CAD 1.2309 1.2450

USD/CNH 6.4689 6.4908

AUD/JPY 83.05 83.65

AUD/NZD 1.0698 1.0725

AUD Thoughts

The Aussie is firmer than it was a week ago, with bulls back at the helm and risk appetite in general supported by the “Goldilocks” view of last week’s US Nonfarm Payrolls. Despite the strong headline number, the dollar failed to move higher even though 850,000 jobs last month had been created, easily beating expectations and after rising 583,000 in May.

The Unemployment Rate rose to 5.9% from 5.8% in May, while the closely watched average hourly earnings, a gauge of wage inflation, rose 0.3% just last month; and there lies the catalyst for a softer US dollar. The devil in the detail is what markets have traded, taking profits as investors are taking the view that the Fed is not going to be in a rush to adjust its policy any time soon. Markets will look ahead to the Federal Open Market Committee meetings on July 27-28 and September 21-22, along with the Jackson Hole Symposium August 26-28. Between now and then, low volatility could well be back in forex for a while longer as we approach the summer lull.

The question is whether the greenback can continue on its northerly trajectory. The progress in jobs gains will be welcomed by the Federal Reserve and likely to keep US money market rates biased towards a 2022 rate hike which should be supportive of the lower yielders, at least.

For AUD, the focus will be on the Reserve Bank of Australia on Tuesday and whether the central bank will follow others and start signaling a rate hike in 2022. If the markets will be forced to re-price some of their hawkish expectations, then that could also put pressure on AUD.

Offering interest remains thick to 0.7600 while demand remains thick as we dip back towards last week’s low at 0.7445.

Event Risk Data Today

NZ: ANZ business confidence made a record low in April and rebounded in May. The June reading should extend the rebound.

Australia: May ANZ job ads are out. April saw a record contraction in April as employers froze recruitment. The market will be looking for signs of recovery in the May NAB business confidence survey after conditions collapsed over March and April.

Euro Area: The preliminary read of Q1 GDP should be unchanged from the flash (market f/c -3.8%).

US: Reflecting the broader stabilization of conditions, the May NFIB small business optimism survey is expected to print at 92.2. The index fell to a seven-year low in April, led by weakness in the job creation and revenue expectations subcomponents. JOLTS job openings are expected to decline again in April (market f/c 5750), and the final print of wholesale inventories will round out the day (market f/c 0.4%).