6th September 2021 - AUD/USD bulls are up against a wall of resistance on RBA week.

Market Headlines

The eagerly awaited US jobs report was weaker than expected, but only caused a modest fall in the US dollar. Bond yields actually rose in response, perhaps reflecting inflationary implications. The S&P500 closed unchanged. US 2yr treasury yields fell from 0.21% to 0.20%, while the 10yr yield rose from 1.29% to 1.33% in response to the jobs data. The response seems odd, perhaps partly explained by the inflationary implications of the report – QE tapering likely to be delayed slightly but low unemployment indicating capacity pressures building.

US non-farm payrolls in August rose only 235k against the median estimate of 725k. A surprising lack of any job growth in hospitality (which had been averaging 350k-400k in recent months) was the standout of the shortfall, but service numbers were generally low. Upside revisions (+134k in prior two months) to earlier releases were insufficient to offset the surprise. However, other parts of the survey were solid. Unemployment fell, as expected, to 5.2% from 5.4% with underemployment declining to 8.8% from 9.2%. Average hourly earnings rose to 4.3%y/y (est. 3.9%, prior 4.0%).

Commodities, Brent crude oil futures fell 0.6% to $73, copper rose 0.9%, gold rose 1.0%, and iron ore rose 2.1% to $143.

Overnight Currency Range

AUD/USD 0.7395 0.7477

EUR/USD 1.1866 1.1909

GBP/USD 1.3818 1.3890

USD/JPY 109.59 110.07

NZD/USD 0.7107 0.7170

USD/CAD 1.2495 1.2558

USD/CNH 6.4244 6.4569

AUD/JPY 81.21 82.12

AUD/NZD 1.0401 1.0445

AUD Thoughts

The doves are swooping down on the Federal Reserve and hawks are gathering pace elsewhere, such as at the European Central Bank. Convergence between central banks is knocking the air out of the greenback and blowing it back into the commodity complex instead.

Short covering is the name of the game as US dollar longs are squeezed which is giving rise to a rally in risk, including the Aussie dollar which had a relentless daily run last week of over 2.6% vs USD.

The US Non-Farm Payroll report provided additional support, as the data have implications for when the Fed will announce a bond market taper. The September Fed meeting is no longer expected to announce timings of tapering, but more than likely highlight the lack of duality between a taper and a rate hike. Meanwhile, the debate over the ECB's next step continues following higher inflation readings and hawkish rhetoric from particular ECB officials.

AUD/USD's rally has happened despite the lockdowns. In actual fact, the bulls were probably enthused by the news of a deal with the UK to secure four million doses of Pfizer. Prime Minister Scott Morrison last week announced the deal would add 4 million Pfizer doses to Australia's supplies, doubling the nation's Pfizer supply this month. The first flight from London was carrying 164,970 doses landed on Sunday evening while the second, carrying 292,500 doses, arrived a few hours later.

Deputy Chief Medical Officer Sonya Bennett said the extra vaccines had bolstered the vaccine rollout which should be reassuring for financial markets in APAC this week. This is especially key on a week when the Reserve Bank of Australia is set to meet on 7 Sep.

However, the general consensus was that as new infections in Australia continue to rise despite the lockdowns until the vaccination rollout gathers steam, the Reserve Bank of Australia (RBA) would be expected to delay its QE tapering (AUD 5bn to 4bn/month).

Supporting the currency, the economy of Australia expanded 0.7% QoQ, beating the consensus forecast of 0.4%, and the trade surplus in July widened to a record high of A$12.1bn in July on the back of higher exports of LNG, coal and iron ore.

AUD/USD closed last week at 0.7450 with offering interest now expected ahead of 0.75c while demand has likely followed spot higher and rests in the 0.7380/7400 region.

Event Risk Data Today

Australia: August updates for the MI inflation gauge and ANZ job ads are due.

New Zealand: Building work is expected to rise 1.3% in Q2 on strength in residential construction. In August, ANZ commodity prices received support from meat prices, but these gains look to have been offset by weakness in dairy and forestry prices

Euro Area: September Sentix investor confidence will provide a timely update of market participants’ views on the outlook and delta risks (market f/c: 19.7).

US: Markets are closed for the Labour Day public holiday.

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