Aussie Down on Risk Sentiment and Business Confidence, Yen Also Soft

Australian Dollar is trading broadly lower today, primarily due to selloff in stocks in Hong Kong and China as markets reopened after holiday. This downward pressure is compounded by the decline in Australian business confidence, which turned negative. ANZ has become the first of the big four banks to push its forecast for RBA next rate cut from November this year to February 2025. However, this adjustment has provided little immediate support for Aussie .

Japanese Yen is also experiencing selling pressure, making it the second weakest currency for the day at this point. Japanese Finance Minister Shunichi Suzuki did not make any new comments about Yen’s recent depreciation. Nevertheless his remarks last Friday emphasized that any foreign exchange intervention would depend on necessity and effectiveness. Investors are now closely watching the upcoming BoJ meeting, with speculation that the central bank might start tapering its bond purchases.

Meanwhile, Euro is making a modest recovery from yesterday’s selloff but remains the weakest performer for the week. Euro’s rebound is limited, indicating persistent concerns about the region’s political uncertainty. In contrast, British Pound is showing mild strength as markets anticipate upcoming job data.

Dollar is holding onto some of its recent gains, though it lacks the momentum for a significant rally. Market participants are cautious, likely waiting for tomorrow’s US. CPI data release and FOMC rate decision, along with the updated dot plot, which will provide clearer guidance on Fed’s policy easing path.

Technically, GBP/CHF stabilized after dipping to 1.1360 last week but lacked momentum for recovery. Risk will stay on the downside as long as 1.1480 minor resistance holds. Below 1.1360 will target 38.2% retracement of 1.0634 to 1.1675 at 1.1277 and below. But strong support should be seen around 1.1167 (50% retracement at 1.1155) to bring rebound, at least on first attempt.

In Asia, at the time of writing, Nikkei is up 0.36%. Hong Kong HSI is down -1.66%. China Shanghai SSE is down -1.15%. Singapore Strait Times is down -0.24%. Japan 10-year JGB yield is down -0.016 at 1.023. Overnight, DOW rose 0.18%. S&P 500 rose 0.26%. NASDAQ rose 0.35%. 10-year yield rose 0.039 to 4.469.

ECB’s Lagarde: No linear path for interest rate cuts

In a joint interview with four European newspapers, ECB President Christine Lagarde dismissed the notion that last week’s quarter-point rate cut would be the start of a series of similar moves. Lagarde made it clear that “interest rates will not necessarily move downward in a straightforward manner.”

“We are not following a pre-determined path,” she explained, noting that “there could be periods where we leave interest rates unchanged.”

When asked if rates could remain unchanged for multiple meetings, Lagarde said, “It’s possible. We need to observe how labor costs evolve and ensure that earnings continue to absorb the recent increases.”

Lagarde emphasized ECB’s ongoing efforts to control inflation, stating, “We are still in tightening territory and will continue as long as necessary to bring inflation back to 2 percent.”

Australia’s NAB business confidence returns to negative, inflation pressures re-emerge

Australia’s NAB Business Confidence fell from 2 to -3 in May, returning to negative territory. Business conditions also saw a slight decline, dropping from 7 to 6. Specifically, trading conditions decreased from 13 to 10, and profitability conditions fell from 6 to 3. However, employment conditions improved, rising from 2 to 5.

NAB Chief Economist Alan Oster noted pointed out that forward orders are particularly weak in retail, wholesale, and construction sectors, indicating potential challenges ahead. Despite a slowdown in activity, capacity utilization remains above average, suggesting that the “process of bringing supply and demand back into balance remains incomplete”.

Inflationary pressures are re-emerging, with labor cost growth increasing to 2.3% on a quarterly basis, up from 1.5% in April. Purchase cost growth also rose to 1.9%, compared to 1.3% previously. Overall product price growth climbed to 1.1%, up from 0.8%, with retail price growth increasing to 1.6% from 1.0%, and recreation and personal services prices edging up to 1.0% from 0.9%.

Oster concluded that the data presents a “mixed” picture for RBA. There are clear signs of growth challenges, yet inflationary pressures remain a concern. “We expect the RBA to keep rates on hold for some time yet as they navigate through these contrasting risks.”

Looking ahead

UK job data is the main focus in European session. Later in the day, US will release NFIB business optimism index. Canada will publish building permits.

AUD/USD Daily Report

Daily Pivots: (S1) 0.6588; (P) 0.6599; (R1) 0.6623; More...

Intraday bias in AUD/USD remains neutral at this point. On the upside, firm break of 0.6713 will resume whole rise from 0.6361 to 0.6870 resistance next. However, sustained break of 0.6578 cluster support (38.2% retracement of 0.6361 to 0.6713 at 0.6579) will dampen this bullish view, and bring deeper fall to 61.8% retracement at 0.6495.

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Fall from 0.7156 (2023 high) is seen as the second leg, which could have completed at 0.6269 already. Rise from there is seen as the third leg which is now trying to resume through 0.6870 resistance.

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