Some negativity was permeating across Asian equity markets mid-week thanks to Fitch downgrade news. Whilst not a game-changer, news that Fitch downgraded the US credit rating by a notch was enough to put risk appetite on the backfoot as evidenced by the red numbers across the board. Adding to the degree of caution exhibited across risk assets is the fact that US NFP data looms large at the end of the week.
With markets remaining sensitive to interest rate outlooks, the NFP data has the potential to tilt Fed expectations for September one way or the other. Ahead of that, the ADP figures will be closely watched given that tightness in the labor market can slow the pace of disinflation. So overall, between the Fitch news and the looming NFP data there are some risk events circling which might be enough to cause some hesitation amongst investors.
The Australian Dollar has been on the defensive in recent days. The slide began after Tuesday’s China Caixin Manufacturing data and was then exacerbated by the RBA’s interest rate hold. Last week’s CPI reading which showed inflation slowing from 7% to 6% from quarter to quarter gave the RBA the luxury of holding fire this month. But that’s not to say the RBA is finished with the current tightening cycle. The RBA is in the same boat as many other central banks – if the process of disinflation is not deemed quick enough then more interest rate hikes are lying in wait to speed up the process of returning to target inflation levels. In terms of the AUDUSD rate, it has fallen more than 1%over the last twenty-four hours on a combination of the weak China data, the RBA hold and a strengthening USD.
The DXY surged above the 102.20 before experiencing a mild pullback on profit taking. This was despite some mixed US macro data. However, moves higher in the two- and ten-year US treasury yields underpinned the green back strength, while the currency also benefitted from some safe-haven buying flows. Gold has been facing a headwind this week in the form of an appreciating USD. The precious metal did get a moderate boost from the US credit downgrade news to move back towards the US$1950 level however any further gains will likely require a pullback of the USD.
Oil continues to hold up well despite the rising greenback, though this patch of USD strength we are witnessing is making further progress for the oil price harder to come by. A resilient US economy that looks a good chance of avoiding a recession combined with the promise of Chinese stimulus is keeping the oil market upbeat. Also, we heard some positive comments from the head of BP about the demand outlook. These comments added to the chorus of optimism heard from the big oil company execs over the past week, which is helping to calm concerns over demand levels over the rest of the year and heading into 2024. Meanwhile, over on the supply side, OPEC+ should be quite happy I would imagine given that the price has risen more than $10 over the course of the last month.