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The Australian dollar is grinding higher as expectations for rate cuts from the US Federal Reserve build

  • The Australian dollar rose late last week despite an escalation in tensions between the United States and several of its major trade partners.

  • Expectations for rate cuts from the US Federal Reserve continue to grow, helping to drag the greenback lower.

  • The domestic economic data calendar in Australia is extremely busy on Monday.

  • Along with any trade-related headlines or tweets, manufacturing PMI reports from around the world will also garner plenty of interest, especially in the United States and China.

The Australian dollar pushed higher on Friday, reflecting broad weakness in the greenback as market expectations for rate cuts from the US Federal Reserve continued to build.

Those gains have largely been sustained in early trade on Monday.

Here's the scoreboard at 8.10am in Sydney.

AUD/USD 0.6929 , -0.0009 , -0.13%
AUD/JPY 74.98 , -0.20 , -0.27%
AUD/CNH 4.8069 , 0.0009 , 0.02%
AUD/EUR 0.6202 , -0.0002 , -0.03%
AUD/GBP 0.5483 , -0.0004 , -0.07%
AUD/NZD 1.0601 , 0.0022 , 0.21%
AUD/CAD 0.937 , -0.0002 , -0.02%

Despite increasing investor risk aversion in stocks, bond and commodity markets on news the United States will gradually begin to introduce staggered tariffs increases on Mexican imports entering the country from June 10, the Aussie dollar was largely immune to the report, steadily rising against the greenback on Friday, eventually topping out at .6944 before closing the week at .6938.

Richard Grace, chief currency strategist at the Commonwealth Bank, said the weakness in the greenback reflects growing investor concern that the impact of tariffs is "generating a larger economic impact on US growth than previously assumed", resulting in increased speculation over the prospect for rate cuts from the Federal Reserve in the period ahead.

"US 10-year treasuries declined nine basis points on Friday, closing at an 18-month low of 2.12% after US stocks declined on the trade tensions and the US April core PCE deflator remained at a modest 1.6% year-on-year," Grace said in a note released on Monday.

Despite widespread expectations for rate cuts from the RBA this year and next, including on Tuesday this week, the steep decline in US bond yields helped to support the AUD/USD on Friday.

"The move lower in US yield weighted on the US dollar Index with a repricing in Fed expectations now seen the chances of a 25 basis point rate cut fully priced by September while a cumulative 54.3 basis points of cuts are now expected by December," said Rodrigo Catril, senior FX strategist at the National Australia Bank.

So not one but two 25 basis point rate cuts from the Fed are now expected this year, with the small risk of a third cut also being priced in.


Turning to the session ahead it will be a busy one for investors, reflecting not only fluid developments on US trade tensions with a variety of different nations but also a busy data calendar.

In Australia, the Ai Group Performance of Manufacturing Index for May will arrive at 8.30am AEST. That will be followed 90 minutes later by CoreLogic's Home Value Index for May at 10am AEST.

Ahead of Australia's Q1 GDP report on Wednesday, the ABS will also release business indicators for the March quarter at 11.30am AEST, including the contribution of private non-farm inventories, a major GDP input.

ANZ job ads and the Melbourne Institute's inflation gauge will also be released on Monday in Australia.

Outside of the domestic data releases, other highlights today include manufacturing PMIs from China, Japan, Europe, the UK, US and Canada.

On the central bank speakers' front, Mary Daly, Tom Barkin, James Bullard and Randal Quarles from the US Federal Reserve are also scheduled to deliver speeches.

As has been the case for several months now, Grace at the Commonwealth Bank says trade war headlines will continue to have a large influence over currency market movements this week.

"Trade tensions will continue to impact currency markets this week," he wrote.

"Over the weekend, China revealed it had established a list of US 'unreliable entities' including selected US delivery companies, in what appears a retaliation to the US treatment of some specific Chinese companies.

"US-China trade tensions remain high."