Three Key Fundamentals to Watch This Week
1) RBA Rate Decision on Tuesday
Tuesday night, at 0530BST/0030EDT we have the latest rate decision from the RBA. The Australian central bank is expected to keep rates on hold at 0.25% and the parameters of its yield curve control programme unchanged with a 3-year Australian government bond target of 0.25%.
AUD traders will be on the lookout for any comments regarding AUD’s recent strength and the implication this could have for the Australian economic outlook.
Note; RBA Governor Lowe recently said that there is no evidence that AUD is overvalued, and has in the past called for global central banks not to try and talk their own currencies lower.
However, other RBA board members have shown more concern regarding recent AUD strength, with one noting that they would not like to see AUDUSD above 0.70 (it is currently trading just below this level today).
For context as to why this matters; Australia is a BIG export economy, shipping natural resources and farm goods in droves to growing Asian economies including, most importantly, China. The more expensive AUD, the more expensive are Australian goods to buy, so the RBA has in the past tried to keep a lid on AUD in order to help the economy.
This is something that the RBNZ are doing right now! Recently, they noted how NZD strength could be damaging for New Zealand’s economy, and have been maintaining the threat of negative rates, direct monetisation of government debt and FX intervention in a bid to keep a lid on NZD.
Could the RBA go the same route? If they do, this could hit AUD pretty hard. If not, it ought to be a mild AUD positive.
2) Canadian Jobs Data on Friday
The weak finishes with a bang for CAD traders, as we get June’s official jobs report.
The May jobs report that we got at the start of last month was a big surprise, with employment unexpectedly rising by some 290k, offering some hope that the Covid-19 pandemic economic trough might have already been reached.
The jump in May was facilitated by an easing of lockdown restrictions and allowing of some nonessential business to re-open, allowing individuals to return to work. Given that this reopening trend has continued into June, market look to see whether the Canadian jobs market added further jobs last month.
Expectations are for a 700k rise in employment, and a subsequent drop to 12.0% in the unemployment rate. As is typically the case with this kind of data, should the Canadian economy rebound more firmly than expected in June (i.e. more than 700k jobs added and unemployment below 12.0%) this will be CAD positive. If the data is weaker than expected, this will be CAD negative.
3) Covid-19 trends in the US and globally
Despite continued growth in new cases in the US and globally, risk assets started the week firmly on the front foot. Why is it that the apparent worsening of the global pandemic is not having more of an adverse affect on equity markets?
Unlike in the “first wave” that hit the US and Europe, we have not yet seen a huge spike in deaths. For example, though new cases in the US were again above 50k yesterday, deaths were just 271, well below their April highs of above 2000 per day.
This has raised some speculation that perhaps the virus has become less deadly. Perhaps the higher case count and lower death rate is just a sign of increased testing, or in countries outside of the US and representation of younger populations, who are better equipped to survive with the virus.
What ever is going on, deaths have not drastically spiked yet. Over the coming week, and remainder of this month, whether or not we see another big jump in deaths in the US (and elsewhere) will be a key determinant of sentiment.
Without much higher deaths, full lockdowns as we saw back in March/April are unlikely.
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