Daily Market Analysis

Traders Cautious Ahead of FOMC Minutes, NFP

July 5, 2023

The Australian Dollar is showing some strength despite theRBA rate pause this week. The currency pushed above the US$0.67 level beforehitting some stern resistance which resulted in the AUDUSD pair consolidating aroundUS$0.6680. It seems that the RBA were encouraged by the drop in headlineinflation (which went from 6.8% in April to 5.6% in May) and even though thejobs market remains very tight and retail sales have ticked higher, the turnlower in inflation has given the central bank some breathing room before decidingon the extent of further tightening.

At present, the RBA has not progressed as far along the rate hike curve as other central banks such as the FOMC, BOE, BOC and RBNZ. Which means that on the one hand, the AUD remains at a yield disadvantage to some of its main counterparts, however it also means that the RBA potentially has more room on the upside before reaching the terminal rate setting, and it is this latter scenario that is keeping buyers interested in the Aussie Dollar.

US Markets were closed on Tuesday and the resulting drop in liquidity contributed to some greenback weakness. With demand for the USD being subdued, gold gained ground and is now within touching distance of the 100 day Moving Average. However, between now and the end of the week there are two notable events on the calendar which can impact the direction of both gold and the USD, namely the FOMC minutes and the US jobs data on Friday.

So, while gold has been edging higher and creating a buffer above the US$1900 level, either a hawkish sounding Fed or a hot US jobs number both have the potential to propel the greenback higher at the expense of the gold price. Meanwhile, a breakout move higher remains elusive for oil despite confirmation this week of supply cuts from Saudi Arabia and Russia, with demand concerns continuing to act as a price constraint. Elsewhere, equities are trading in cautious fashion ahead of the FOMC minutes and the non-farm payrolls data later in the week, with investors mindful that interest rate expectations could be reshaped depending on how the cards fall with regards to these key releases.

The release of the latest Caixin data today demonstrated that the services sector in China remains a relative highlight compared to the struggles of the manufacturing sector. Caixin Services PMI came in at 53.9, which is in expansionary territory however the concern is that it was below expectations (56.2 expected) and below the prior reading of 57.1. The fact that this gauge of services activity came in above the key 50 level is a relief of sorts, but the southward direction remains a concern as doubts continue to swirl about whether a Chinese economic recovery will materialize before the year is out.

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