Chinese Deflation Points to Policy Adjustment
AUD
The Aussie Dollar kicks off the day a little higher against all majors bar the USD, supported by positive commodity performance which saw Iron Ore +1.0%, Copper +1.6%, Natural Gas +2.4% and Gold +0.1%. Asian equities started the week lower, with the Nikkei -0.5%, Hang Seng -1.4% and Shenzhen -1.2%. Locally, the ASX retreated -0.3% as consumer discretionary and energy weighed on the index. Yesterday’s Chinese inflation figures continued to disappoint, with producer prices shrinking at the fasted pace in four months (PPI y/y -1.8%), while consumer prices posted a mild increase (CPI y/y +0.6%), largely attributed to volatile food costs. Deflation has been stalking China since last year and is now showing signs of spiraling, threatening to worsen the outlook for the world’s second-largest economy (and Australia’s largest trading partner) and raising calls for immediate policy action. If left too long, the issue could snowball as households are encouraged to rein in spending amid expectations of further price decreases. China’s economic challenges remain priced-into our domestic currency, with any signs of a positive turnaround likely to boost the AUD. Later this morning, we’ll see Westpac Consumer Sentiment and NAB Business Confidence data. Tomorrow morning, RBA Assistant Governor Hunter will be speaking at an economic forum in Sydney.
USD
AUDUSD traded largely sideways throughout the course of yesterday, struggling to find direction and touching lows of 0.6648 ahead of this morning’s open at 0.6663, being relatively flat on yesterday’s open. Wall St. rebounded overnight with both the Nasdaq and Dow +1.1% while the S&P 500 gained +1.2%. Little meaningful US data yesterday and today as the focus this week turns to the CPI figures for August, set for release tomorrow evening. At the recent Jackson Hole Symposium, Fed Chair Powell was quite direct about his inflation assessment. He stated inflation is now much closer to the Fed’s objective and that “upside risks to inflation have diminished”. He also noted “the time has come” for monetary policy to adjust, prompting a hefty response in currency markets, with the AUDUSD rallying over 1%. Tomorrow’s inflation report remains important given the debate about whether the Fed will opt for a 25 or 50 bps cut next week. Annual US inflation is expected at +2.6%, being a little softer than last month’s +2.9% print.
EUR
AUDEUR made gradual advances over the past 24h, opening today at 0.6036. The DAX and CAC gained +0.8% and +1.0% respectively. The major piece of Eurozone data this week will be the European Central Bank interest rate decision, on Thursday evening. Following July’s pause at 4.25%, the ECB is widely seen resuming its easing path this week. Falling inflation, a strengthening Euro and an expected Federal Reserve rate cut next week provide all the scope needed while an ongoing sluggish economy offers plenty of justification for the expected 25 bps cut. Along with the rate announcement and statement, the central bank will deliver its latest economic forecasts.
GBP
AUDGBP opens a little higher at 0.5094, with the FTSE posting +1.1% gains in yesterday’s session. Zero UK data over the past 24h. Given the UK economy bounced back in the first half of 2024 with wage growth and services inflation still elevated, the Bank of England is expected to buck the central bank trend in September and keep rates on hold when it meets next week. The central bank’s decision will ultimately depend on incoming data, such as this afternoon’s important labour figures. The number of people applying for unemployment benefits is expected to be much lower than last month, while the cost of labour is expected to have increased at a slower pace. An upside surprise to this figure would likely hinger the BOE’s fight against inflation and strengthen the Pound.
NZD
AUDNZD hit 1.0857 highs in yesterday’s session before retreating to kick off the day at 1.0841, being still higher than yesterday’s open. This morning’s Manufacturing Sales q/q posted a +0.1% increase with little impact on the NZD. The next key release will be the BusinessNZ Manufacturing Index on Friday morning.