AUD Climbs To 3 Month Highs Ahead Of RBA – What To Expect

The first day of June kicked off with broad-based US dollar weakness. The greenback traded lower against all of the major currencies as equities moved higher. Americans are growing increasingly nervous about the protests in US cities but investors have been unfazed. We can’t see this optimism lasting as it is almost certain that the protests will impact investor confidence. Historically the economic impact of protests and riots tend to be short-lived, but rising virus cases could be a dangerous consequence. The protests are important but the number of protestors screaming without masks poses a major risk to the progress being made. If COVID-19 cases spike in New York City, the proposed June 8th phase one reopening could be pushed back. With that said, the rally in equities can be attributed to the market’s relief that Trump Administration’s response to China’s new national security law in Hong Kong was relative tepid. However, reports that China has asked state firms to halt some purchases of US soybeans and pork could trigger further threats of retaliation from President Trump. US data was also weaker than expected with the manufacturing ISM index rising to only 32.1 against a 35 forecast.

The best performing currency today was the Australian dollar which rose approximately 1% ahead of the Reserve Bank of Australia’s monetary policy announcement this evening. When the RBA met in May, the Australian dollar rallied despite the central bank’s commitment to doing what is necessary to support jobs, incomes, and businesses including scaling up bond purchases. In their Quarterly statement on monetary policy, they said they expect the economy to contract 6% this year and the jobless rate to soar to 9% as many jobs lost become permanent. Yet the economy is in the process of reopening and the data since the last meeting shows the widespread improvements (see table below). Retail sales jumped 8.5% in the month of March with stronger recovery expected in April. Last night’s manufacturing PMI index also ticked up to 41.6 from 35.8. Major job losses were reported in April but the unemployment rate rose less than expected and both consumers and businesses feel less pessimistic. China, Australia’s largest trading partner also saw broad-based improvements in April.

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