Last night US weekly jobless claims printed 255,000 for the past week. That is the lowest level of weekly claims since November 1973. That was much lower – economically stronger – than forecasts, and even though there are some mitigating circumstances this number continues to reinforce the market belief that the Fed will soon begin raising interest rates.
Market recognition of this fact has been an important reason why the Aussie dollar has been under pressure for some time now. It’s trading just below 73 cents against the US dollar in Asian trade on Friday after the weak China “flash” PMI data was released. That’s down around 5% over the past month and around 7.5% over the past 3 months.
A big part of the Aussie’s weakness has come from traders’ belief that the recent strength in the US dollar will be underpinned by the Fed’s tightening.
It’s an argument the RBA has made many times as well.
That’s because even though a 0.25% move higher in US interest rates, widely anticipated in September this year, is small in the grand scheme of global investment returns, the change in direction by the Fed is a reflection of improved US economic strength.
Zero per cent interest rates are not compatible with the strength in US jobs, housing or the broader economy.
That means the Fed is going to be moving more than once, and probably more than twice. Forex players know that and the US dollar’s strength is a reflection of it. Jobless claims last night simply reinforced this.
But the big question, is this: How much of the Fed’s move, and how much of the recent commodity weakness is already baked into the cake for the Aussie dollar?
The ANZ said their FX Monthly Outlook released this morning that the Aussie dollar’s fall has “now surpassed our end of quarter forecast.” That forced them to dust off “some of our valuation metrics to reassess the level of the AUD and once again ask: what is priced in?”
Their model, “which encapsulates commodity prices and interest rate differentials” suggests, “there is some risk premium finally starting to be priced into the AUD, and perhaps we are another step closer to some stabilisation.”
They say that their modelling shows the Aussie dollar’s fall has been a result of “the path of both commodity prices and yield spreads.”
Westpac agrees and in its ForeX Focus, also out today, the bank highlights that the Aussie dollar’s woes are broader than just the fall in iron ore. From the note:
Commodity weakness goes well beyond iron ore. Copper prices are printing lows since the GFC. Coking coal prices have slumped to 10+ year lows. In the chart…we plot AUD/USD against the Bloomberg Commodity Index, which tries to capture global prices. Still, it paints a similarly grim picture for AUD to that produced by indices of Australian export prices. Until we see some stability in this measure, global investors are likely to be uneasy about the potential warning signs it is sending about global demand, given that expanding supply is not a feature of all commodities. As such, AUD, CAD and NZD rallies should remain fragile multi-week.
It all adds up to a near term forecast from Westpac that the Aussie will trade “either side of 0.7400. In coming months, risks remain towards 0.72, with trade as low as 0.70 quite plausible.”
ANZ is forecasting the Aussie will end the year at 72 cents but also says, “risks remain clearly pointed to the downside.”
Today’s price action shows that both Westpac and the ANZ are right in their view that the bias is still to the downside.
But the big question remains: exactly how much of the bad news is “baked in the cake”?