Australian Dollar Roars on Easy Fed

Base metals have repaired the recent damage:

Not so big miners:

Nor EM stocks:

Junk is fine, though:

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The curve steepened:

But growth led again:

Westpac has the wrap:

Event Wrap

US durable goods orders in July were close to expectations, in a solid report overall given supply chain disruptions. The headline measure fell 0.1%m/m, slightly stronger than the -0.3% expected (although prior revised down by 0.1%). Ex-transport orders rose 0.7% (vs +0.5%, prior revised up by 0.1%).

Germany’s IFO survey was mixed, with the business climate reading falling more than expected to 99.4 (est. 100.4, prior 100.7). Current assessment rose to 101.4 (est. 100.8, prior 100.4), but there was a deeper decline in expectations to 97.5 (est. 100.0, prior 101.0).

Event Outlook

Australia’s CAPEX survey is expected to point to a 0.8% gain in total investment in Q2. The focus ahead of GDP however will be the equipment investment sub-component, which we see gaining circa 3%. Estimate 3 for CAPEX in FY2021/22 was sampled at a trying time for Australian businesses. As a result, we anticipate a weaker than usual upgrade from Estimate 2. Rather than the typical 12%, it might be closer to 7.5%. Note the latest fortnightly read for payrolls will also be released today.

In the US, Q2 GDP is expected to only be revised at the margin (if at all) in its second estimate. Initial claims should also edge lower, though delta is a clear risk to that view. Finally, the Kansas City Fed index will provide yet another regional view of manufacturing in the US.

And HSBC the analysis of what matters:

The revival in risk appetite in a week where the focus is largely on Fed Chair Powell’s speech at Jackson Hole suggests the market is looking for helpful observations. This is interesting given it is only a week since risk aversion spiked (belatedly) in the wake of the minutes from the July FOMC, propelling the dollar to a new YTD high and consigning “risk on” FX to a troubled few days. But can Chair Powell really move the dial very much on the taper debate from the tone in those minutes which so spooked the markets? And even if he can, will it really play as a “risk on” challenge to the USD?

We are not likely to hear any details on the pace or duration of the taper, as this would need to be agreed and announced at a FOMC meeting. Chair Powell is likely to repeat many of the observations made in the minutes, including that most FOMC members favour a taper announcement this year, subject to the data. Presumably, this last detail is where the hope for doves and dollar bears alike lies. The continued spread of COVID-19, and recent US data disappointments may encourage Powell to highlight the downside risks and an openness to delay the taper if appropriate. After all, the dollar bears will argue, even the Fed’s more hawkish Robert Kaplan has recently flagged these risks as grounds for patience.

But this reliance on a more prominent risk case brings its own risks for dollar bears. At a time when global growth may be peaking out, the markets will not want to also start fretting about the US economy’s contribution to activity. If Powell is too ardent about the risks, he could provoke a dollar-bullish / risk-off reaction such as we saw after disappointing US retail sales and consumer confidence numbers. Alternatively, if he does not give the risks much airtime and instead focuses on the recovery and the merits of policy normalization, the USD would also likely rally. Dollar bears may only retain their recent gains if Powell can cite the risks, indicate it means no rush to the exit for the Fed, while still remaining upbeat on the US economic outlook. The bears need him to deliver this balancing act. Instead, we suspect the FX balance of risks favours a return of a grinding stronger dollar.

I have no idea how the market will react to the speech. But I agree that the grinding higher DXY is the base case for years.