AUD/USD

The down move in the AUD/USD, which started on April 21st, doesn’t look as though it has run its course. Tuesday’s Building Approvals and Current Account data will be closely watched for a turn in the recent string of weaker data. Both sets of data are forecasted lower and it’s likely that last week’s low of .7140 will be challenged on “as expected” readings.

US Macro

The three week rally in the USD Index continued on Friday as FED chief, Janet Yellen, endorsed the notion of higher US rates in “coming months” and that growth in wages has finally caught up to the growth in the general labor market.

The shift in expectations for the resumption of the FED’s normalization of US interest rates has played an integral role in the recovery of the USD. And while a few FED officials have pointed to the UK referendum on June 23rd as a foreign threat, there have been several recent changes to open market pricing which suggest the FOMC is ready to move on rates sooner, rather than later.

As a rule of thumb, FX traders look at the short-end of the Treasury yield curve to gauge whether the trajectory of rates is suitable for a lift in the Federal Funds rate. In this respect, the implied yield of the August FED Funds futures contract has risen by 15 basis points since May 1st, while the US 2-year note yield has moved 20 basis points higher over the same period.

These data are widely published and fairly easy to follow even for novice investors. However, since the FED began its tapering operations back in October 2014, one of the most fundamental perquisites of the normalization process has been a contraction in the FED’s balance sheet.

The main open market policy tool for the FED to drain excess reserves from their balance sheet is called a Reverse Repurchase agreement, or “reverse REPO.” Since these agreements are transacted directly between the FED and FED approved commercial banks, the data can only be sourced from the Federal Reserve website and after the agreements are transacted.

As a point of reference, from October 2015 until the FED lifted the FED Funds target on December 16th, reserve balances at the Fed fell by $180 billion. Since the end of March 2016, reserve balances have fallen by over $120 billion; largely from reverse repos. And while this is not as large as the decrease that took place before the December normalization, it appears significant enough to claim that the FED does seem to be preparing for an upcoming increase in the Federal Funds target range.

As such, we suggest a long USD bias over the medium and longer term as the divergence of the US rate trajectory continues to move away from the rest of the G-7 Central Bank policies.

US Markets

Going into the three-day Memorial Day holiday in the USA, FX traders have been largely sidelined in front of today’s preliminary Q2 GDP data. This will be the first look at what could possibly be a sharp Q2 rebound and extend the recent rally in the USD Index.

Based on some of the critical components of the GDP reading released over the last few weeks, the headline print is forecast to show a .8% growth rate; Retail Sales printed higher, Durable Goods orders were at 3-year high and weekly jobless claims have been tracking at a 20-year low.

Unfortunately, due to seasonal adjustments, indexing and lags in data collection, the Associative Property of mathematics is not entirely useful in forecasting GDP data and there is a risk that a weaker report unwinds some of the recent USD gains into the long weekend.   However, we estimate the likelihood of a terrible, USD negative, GDP report is low and suggest maintaining a long USD bias into the release with the potential for the Greenback to reach new highs for the week.

Australian market finished the week…

The Australian market finished the week to Friday up 1.0% based on the S&P/ASX 200 Index. Small companies outperformed larger companies, with the Small Ordinaries Index finishing the period up 1.7%.

The best performer was the Information Technology sector, up 3.4%. Aconex Limited (ACX) led the performance rising by 14.1%.

The worst performer was the Consumer Staples sector, down 1.7% with Wesfarmers Limited (WES) and Woolworths Limited (WOW) down 3.9% and 0.8% respectively.

US Stocks

Wall Street closed mixed after two days of strong gains as advancing defensive sectors offset declines in materials, banks and other cyclical industries. On Thursday the Dow Jones Industrial Average fell 23.22 points, or 0.13 per cent, to 17,828

US Stocks

Wall Street rose robustly for a second straight session, helped by higher oil prices and investors becoming more comfortable with the prospect of an interest rate hike as early as next month. On Wednesday the Dow Jones Industrial Average added 0.82 per cent to end at 17,851

AUD/USD

The AUD/USD has fallen for five consecutive weeks and with Iron-ore and Copper prices probing 3-month lows, we don’t see any technical indicators pointing to a price reversal this week. The AUD/USD peaked at .7835 on April 21st and posted a low of .7175 early last week and even though short-term indicators are beginning to get stretched, there is little upside momentum.

US Macro

The Group of 7 finance minister’s meeting came and went with nothing more than the same well-worn bromides meant to create the illusion that the leaders of the global financial world are actually solving problems.

Still, the combination of stronger US data and signals from the FOMC that the normalization of rates can still be expected in 2016 helped the Greenback extend its recovery. Since May 3rd, the USD Index has traded higher for three consecutive weeks and gained ground on all the major pairs last week except for the Sterling.