China Slowdown and Plunging Commodities Drag AUD Down

AUD

The Aussie Dollar opens down against major currencies as commodity prices continue to wane, headlined by Iron Ore down -4.3%. Mining stocks responded, dragging the ASX down -0.9% on Friday. Regardless, the index finished the week up +1.6%. Asian equities finished in the red with the Hang Seng the worst performer down -4.1 to 13-y lows as traders weighed ongoing anti-pandemic measures in mainland China, Beijing’s economic and political policies, as well as earnings-season results. The next 48 hours will be important from a macro perspective, with China’s PMI data to be released later today and tomorrow’s RBA Rate decision. China’s PMI data is expected to come in relatively flat (Manufacturing PMI – 49.9, Non-Manufacturing PMI – 50.2), despite the unpredictable Covid-related restrictions that continue to plague the economy, which also suffers from weak consumption and a collapsing property sector. Tomorrow, the RBA faces a tough task in deciding whether to persist with smaller interest rate increases or pivoting back to outsized hikes in an attempt to gain control of hotter-than-expected inflation, as reflected by last week’s CPI release of 1.8% q/q. Financial markets are expecting a second 25 basis point hike, although Governor Lowe has regularly wrong-footed RBA watchers. To the day ahead, we see Aussie Retail Sales m/m, tipped at +0.5%, as well as Private Sector Credit m/m, expected at +0.7%.

USD

The AUDUSD opens down at 0.6404, having touched 0.6389 overnight. A strong finish to the week on Wall St with the NASDAQ posting gains of +2.9%, the S&P 500 +2.5% and the Down Jones +2.6%. US yields pushed higher, supported by strong consumption data, while Crude Oil fell -1% to $88.20 per barrel. US Core PCE rose 0.5% m/m in September in line with estimates with the y/y increase at 5.1% against expectations of 5.2%. Being the FED’s preferred measure of inflation, we see they have more work to do as markets are currently pricing in another 75 basis point hike for Thursday’s Federal Funds Rate announcement. This would take the rate to 4%, while markets currently expect a terminal rate of 5% to be reached by the Fed’s curtailing of hike sizes in the coming months. On Saturday, we saw US Personal Income rose +0.3% to beat expectations of +0.2% while the Q3 Employment Cost Index rose +1.2% as expected. No data to be released today as markets anticipate the Fed’s interest rate decision on Thursday.

EUR

The AUDEUR opens down at 0.6432 with the DAX and CAC closing the session +0.2% and +0.5% respectively. The ECB’s Simkus hit the wires exclaiming the ECB is moving closer to neutral-rate territory, however, inflation to still too high and the policy remains expansionary. He indicated the upcoming hike, in late November, needs to be significant, while ECB’s Villeroy said there’s no obligation to undertake a third 75 basis point hike in December. Today, we see German Retails Sales m/m, expected to fall -0.5% as households continue to take the brunt of declining economic health and recessionary data. Tonight, we see the CPI Flash Estimate y/y expected at 9.9%, with the Core measure tipped at +4.8%. The report arrives 2 weeks before the Final figure and tends to impact markets, so we expect to see some volatility in the overnight session… Particularly if off-expectations.

GBP

The AUDGBP opens at 2-week lows of 0.5521 as the GBP continues to retrace recent losses since the most recent round of musical chairs for the Prime Ministership. The FTSE opens down -0.4%. No data over the weekend, while today we see low-impact Mortgage Approval data, as well as Net Lending to Individuals m/m, tipped at 6.3B and the M4 Money Supply m/m expected at +0.2%.  On Thursday evening we see the BOE Official Bank Rate and Monetary Policy Report. It’s been a wild ride for BOE expectations since September’s infamous ‘mini budget’. The resulting chaos in financial markets had prompted investors to, at one point, price in more that 150 basis points worth of tightening by the November meeting. Since then, UK markets have calmed, buoyed by the appointment of Rishi Sunak as prime minister and the steadier backdrop for public finances that is perceived ushered in. Markets are currently expecting a 75 basis point hike, taking the rate to 3%, although a 50 basis point bump is not outside the picture.

NZD

The AUDNZD opens at 1.1030 after touching 10-week lows of 1.1012 on Friday afternoon. No data expected from the Kiwis today, while all eyes look to Wednesday’s employment figures. The Unemployment Rate is expected to see a slight improvement of 0.1% to come in at 3.2%, while Employment Change q/q is expected at +0.5% which, if on-expectation, would be the largest quarterly increase in employment since November 2021’s figure of +2%.