• BREXIT and the trade dispute between the US and its trading partners is likely to remain the major theme this week. The USD weakened on Friday because of soft growth in wages and a 0.2pp rise in the June unemployment rate to 4.0%. We expect the US‑China trade frictions to support the USD. We also see further upside in USD/CNH and some mild downward pressure on AUD and CAD.
• The USD will also be heavily guided by the U.S. June CPI (Thu). US economists expect a further 0.1% lift in both headline and core inflation to 2.9%/yr and 2.3%/yr respectively, though we see downside risks. Last week’s FOMC minutes suggested a commitment to lifting interest rates to offset building inflation pressures. The USD‑positive theme of global monetary policy divergence will continue to support the USD.
• AUD/USD will feel the impact of a firmer USD. AUD/USD typically comes under downward pressure when global trade volumes are threatened. While we envisage some trade diversion to Australia in response to the US‑China tariffs, Asian supply chains will still be affected. With Asian currencies coming under more downward pressure, we anticipate AUD/USD will similarly depreciate this week.
• USD/CAD and AUD/CAD is at risk of a move higher on Wednesday if the Bank of Canada (BoC) does not increase its overnight rate. The OIS has largely priced a hike. But we expect the BoC to keep the overnight rate steady because: (i) Canadian underlying CPI inflation is contained under 2%; (ii) Q1 GDP growth was weaker than the BoC expected; and (iii) US trade policies are a downside risk to Canada.
• GBP/USD volatility will continue early this week. UK Prime Minister Theresa May appears to have strong‑armed her cabinet in into accepting her ‘soft‑Brexit’ plan. However, two ministers have resigned, including Brexit Secretary David Davis. May’s soft Brexit plan involves maintaining the EU’s rules on goods but not on services. The plan may help solve the Ireland‑Northern Ireland border issue but it is unclear whether the EU will accept May’s plan. A deal must be agreed by October. GBP has significant headline risks. AUD/GBP can lift to test 0.5667 (200 day moving average) in coming weeks.
• EUR/USD will consolidate this week. ECB–FOMC monetary policy divergence will continue, but the Eurozone OIS may price more ECB rate rises. AUD/EUR is likely to remain near 0.6338.
• NZD/USD appears to have bottomed. We expect dairy prices to lift because of trade diversion from US producers following the Chinese government’s imposition of tariffs on US dairy exports. Consequently, AUD/NZD has some downside towards 1.0743 in coming weeks.
• AUD/JPY has fallen by 8% in large part because of US‑China trade frictions. Japan’s large, albeit shrinking, current account surplus can continue to undermine AUD/JPY if trade frictions escalate.
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