• US Dollar softens on weaker outlook
  • Robust demand and low unemployment continue to shield economies
  • With global economies so finely balanced, in which direction will the pendulum swing next?

US Dollar softening

The US dollar has fallen back from its highs in recent weeks. Moderation in the US economic outlook is causing the market to lower the expectation of Federal Reserve base lending rate increases.

The Q2 GDP declining by 0.9% will serve to check too aggressive a rate hike policy that has the potential to derail the global economy over the goal of softening demand.

The US dollar index (DXY) is currently priced at 105.65, having retreated by 2.5% against a basket of major currencies in recent weeks.

The Australian dollar has recovered all the 2.5% plus a little more given its favourable commodity trade balance relative to its peers and is closing back in on the 70 US cents to the Aussie Dollar.

 

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Commodities benefiting from the softening of the US dollar included gold, currently trading at 1,767 USD per oz. Iron ore landed in China clawed back from recent lows to open at 107.22 USD per tonne

Mining conglomerate BHP Billiton ASX:BHP (BHP) and gold producer Newcrest Mining ASX:NCM (NCM) will look to build upon the gains from last week on the back of marginally higher US dollar-priced commodities.

US tech earnings leading Aussie tech

Some resilient results from Apple Inc. NASDAQ:AAPL (AAPL), Microsoft NASDAQ:MSFT (MSFT), and Alphabet d.b.a Google NASDAQ:GOOG (GOOG) in the face of rising wage inflation and a slowing economy propped up the stock market last week.

Promises from US tech CEO’s announcing Q2 2022 results to keep on top of costs, tighten belts and buckle down on productivity were welcomed by investors and lifted the NASDAQ out of the muck and above June highs to reach 12,390 by the close.

Aussie tech was supported by the positive earnings news out of the US, Atlassian NASDAQ:TEAM (TEAM), Block d.b.a. Afterpay ASX:SQ2 (SQ2), Xero ASX:XRO (XRO), and Wisetech ASX:WTC (WTC) were all higher on the week.

The S&P ASX/200 is slightly higher to start the week, up by 0.4% to close in on the 7,000 handle.

House valuations are starting to feel the heat

Rising rates are starting to take their toll on Australian house prices outside of the resource-booming Western Australia and South Australia.

Resilient employment in the resource sector continues to prop Perth and Adelaide prices while the rest of Australia starts to take the brunt of record inflation.

Aggregate Australian dwelling valuations fell again in July, down 2% from April’s peak. Perth, Adelaide, and Darwin continue to buck the trend, although growth has slowed to 0.2%, 0.4%, and 0.5% respectively, month over month.

The week ahead

China’s staggered reopening is preventing stratospheric oil prices while the demand for cargoes remains high in Europe following Russian oil displacement to the Western markets.

US oil production continues to surge ahead. Another nine rigs were added in the US last week, 57% more than at this time last year. According to Libyan Oil Minister Mohamed Oun, Libyan oil production is returning to pre-blockade levels.

The combination of climbing US production, US reserve sales through September and returning Libyan production of roughly another 600,000 barrels a day are likely to keep a lid on oil prices for the time being.

As Europeans continue to struggle under the weight of high energy bills, some Atlantic storms arriving this week will be welcomed by the wind farms and consumers.

The international supply chain remains stretched, but there are green shoots. Perhaps we can look forward to the tide rolling back on inflation soon.