- Australian Dollar Recovered with the S&P500 and Shanghai Composite
- Fed Chair Jerome Powell, PBOC liquidity increase may have helped AUD
- Eyes turn towards Fedspeak, Philip Lowe, Governor of the RBA, US Non-farm Payrolls
This past week, the pro-risk Australian dollar outperformed other markets. It gained alongside the S&P 500 as well as Shanghai Composite. Did markets react in an overreaction to the Federal Reserve's June monetary policy announcement? Financial markets were sanguine despite the consensus of the central bank for at least two rate increases in 2023. This also suggests a sooner-than-anticipated asset buying tapering.
Jerome Powell, Fed Chair, continued to calm fears about tapering at a congressional testimony. He stated that the central bank would not raise rates before they are needed. However, Fed Funds Futures was at the end the week. This indicated that markets had already baked in a 25 basis-point rate increase by the end next year. This market dynamic could be extended if Fedspeak continues, which could boost AUD.
Also, the Australian Dollar may be receiving a slight nudge from China's developments. The People's Bank of China suddenly increased short term liquidity injections. They sold about 30 billion Yuan of reverse repos 7 days instead of the 10b that has been in place since March. These are likely part of daily open market operations' normal sequence, particularly before the end of the second half.
Moreover, the PBOC is normalizing. This is why Chinese equities are underperforming their developed counterparts. China is Australia's largest trading partner. This means that economic developments in China can often have knock-on effects for Australia. It is not unusual for the PBOC to provide liquidity boosts in light of the Chinese Communist Party's 100-year anniversary.
Also, the Australian economic docket looks very light. Philip Lowe, RBA Governor, will be speaking Tuesday at a Sydney banking summit. Although he might reiterate the central bank’s dovish stance. All eyes will be on the US jobs report, which is due to be released Friday. Pay attention to average hourly earnings. Higher readings could indicate that inflation is likely to remain high, increasing volatility risk.
