The Australian dollar drifted higher overnight, supported by a fresh bout of US dollar weakness that came despite a mixed set of US data releases.
First, here’s the Aussie dollar scoreboard as at 7.50am AEST.
AUD/USD 0.7462 , -0.0002 , -0.03%
AUD/JPY 82.68 , -0.04 , -0.05%
AUD/CNH 5.0921 , -0.0014 , -0.03%
AUD/EUR 0.6671 , 0 , 0.00%
AUD/GBP 0.5824 , 0.002 , 0.34%
AUD/NZD 1.0510 , -0.0006 , -0.06%
With US markets resuming trade following the Memorial Day Holiday, traders were delivered a mix read on the health of the US economy with incomes, consumption and inflation data topping expectation while consumer confidence fell.
Elias Haddad, senior currency strategist at the Commonwealth Bank, suggested that it was the inflation report, and subsequent remarks from a leading US Fed official on the outlook for inflation, that led to the US dollar’s weakness.
“USD edged lower overnight and US 10-year Treasury yields fell by roughly 4 basis points to 2.21% on slower US inflation,” he said.
The US core PCE reading — the Fed’s favourite gauge of inflation — eased in April to 1.5% per annum, the slowest pace since December 2015.
While the monthly increase in this reading rose by 0.2%, exceeding expectations that were centred around an increase of 0.1%, it still saw the annual pace slow from 1.6% in March.
At 1.5%, the annual core PCE has now been below the Fed’s 2% target since May 2012.
That’s something that is weighing on the mind’s of some Fed officials, says Haddad, leading some to speculation that the Fed may not hike interest rates as quickly as members previously though.
“FOMC voter Lael Brainard warned overnight that ‘the apparent lack of progress in moving core inflation back to 2% is a source of concern’,” he said.
Those remarks certainly helped the Aussie overnight, as seen in the 5-minute AUD/USD chart below.
Turning to Wednesday’s session in Asia, market activity looks set to pick up with Chinese markets resuming trade following a four-day holiday.
And there’s also a bit of economic data to digest, both in Australia and across the region.
Domestically, the Reserve Bank of Australia will release private sector figures for April at 11.30am AEST. All eyes will fall on the housing figure, particularly towards investor credit, given this report will capture the first full month of APRA’s measures to cool investor lending growth.
There’s also likely to be some passing interest in business credit growth, something that has been weakening in recent months.
Outside of Australia, the other big release comes from China where manufacturing, non-manufacturing and steel industry PMI reports for May will be released.
Economists expect the manufacturing PMI to print at 51.0, down from 51.2 in April. It’s worthwhile remembering that any reading above 50 indicates that activity levels have improved.
There’s no forecast offered for the non-manufacturing PMI report, although traders can use the previous month’s figure of 54.0 as a marker on the performance of China’s non-industrial sectors, now the largest component within the Chinese economy.
While these reports have previously generated short-term volatility in the Aussie, they have lost some of their market clout in recent years, replaced by readings on loan growth which have assisted the recovery in the Chinese economy over the past year.
Japan will also release industrial output, construction orders and housing starts during the session, although they’re unlikely to stir much interest.
Later in the session, markets will receive retail sales and unemployment figures from Germany, CPI and unemployment data from the Eurozone and Italy along with UK consumer credit.
In North America, the data highlights include pending home sales and Chicago PMI in the US along with Canadian GDP figures, both for March and the first quarter of the year.
The US Federal Reserve will also release its latest Beige Book on economic conditions, an important document coming two week’s ahead of the Fed’s June FOMC meeting.