Fundamentals for the week ahead

The main releases this week are

Tuesday:
RBA Rate Meeting + Statement

Wednesday:
AUD GDP release
Monetary Policy Hearing
CAD Rate Meeting + Statement
ISM Services

Thursday:
USD Unemployment claims

Friday:
CAD Unemployment

Saturday:
China CPI/PPI

 

Tuesday:
The Australian overnight rate is expected to remain unchanged – with the rate currently being 4.10% this puts it at the bottom end of the rates spectrum, with only the two traditionally low yielding currencies, the Swiss and the Yen with lower rates.

This also marks the final meeting for Governor Lowe. With rates being at a decade high, further tightening will be unexpected as there has been a decrease in inflation without too much harm to GDP. The below chart shows Inflation QoQ (blue area) with GDP YoY in orange. These metrics are moving back within the historical zone. The GDP is released a day after the rates meeting, and unless it significantly drops it may not impact sentiment too much.

Australia is typically counter cyclical and very much tied to the price of commodities, especially the hard commodities; primarily iron ore and coal, with a significant portion of their exports going to China. Therefore chinese capex projects and energy sector is important on both the short and longer term outlook for the Australian dollar.

If stimulus packages in China are announced, particularly around infrastructure, coupled with an easing of financial conditions which brings liquidity may see The AUD strengthen as this may require rates to stay elevated for longer vs it’s peers; reestablishing that counter cyclical behaviour.

But in the short term, this meeting may just be a holding pattern until the next Governor takes the reins and may not move the market, but with all rate decisions and statements, holding trades carries increased risk.

AUIRMM 2023 09 04 06 39 04 29899

Wednesday

UK monetary police hearing – this has the potential to move markets as it gives an understanding about future policy. A lot depends on the questions asked, but watching this live may give good confluence for any GBP trades.

Canadian rate meeting

With Canada having a lower core rate of inflation relative to its peers it has the ability to wait out to see if further tightening is required. They do not need to risk pushing too far as long as there are no big data surprises. The below chart shows the core inflation rate of the CAD (blue) compared to the US, UK, AUD and Eurozone.

CACIR 2023 09 04 07 04 17 3dbbe

Canadian rates are currently sitting at 5%, which has showed signs of slowing inflation, but it has also slowed GDP.

CAGDPYY 2023 09 04 07 15 11 181cb
However, like the Australian dollar, Canada is somewhat driven by export prices in commodities – particularly oil and gas. The majority of these energy exports, particularly crude oil, goes to the US.

Screenshot 2023 09 04 072008

With the US strategic petroleum reserves at long term lows.

chart 1

This is almost at all time lows, with the SPR being created in the early 80’s with an opening balance of 284,268 barrels, the current reserve stands at 347,159 barrels. This may offer some medium term support for Canada.

US ISM services

The ISM data contains employment, production, new orders, prices, supplier deliveries, and inventory metrics and may support or reject the idea of additional hikes. Last week saw a broad sell off in the dollar (DXY) early in the week which then received to almost unchanged levels.

Thursday

USD Unemployment Claims

The recent NFP although positive, had a downward revision to the previous figure, painting a picture of a slowing labour market and worsening conditions. The JOLTS released earlier in the week showed a continuation in the downward trend which has been in play since February.
With this being a part of the Fed’s mandate, a negative print here may seal the deal for any more rate increases. Inflation markers last week were in line with expectations and not too far way from the target meaning that deterioration in the labour market may quickly become the thing to watch rather than inflation.

Friday

CAD Unemployment: There has been no clear trend or consistency in this release since March this year. This highlights the uncertainty one way or the other with regards to conditions which impacts the labour market.

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Kind regards,

James