Weekly Outlook - Global Trade in Focus on Growth Concerns

The debt ceiling nervousness is gone but now comes the subject of the debt issuance impact to replace funds run down over the last months.

3 Top Stories for the Week Ahead

• U.S. and China trade balances Wednesday

• RBA Rate Decision overnight Monday-Tuesday

• US Bond Auction Monday

U.S. and China Trade Balances

The two largest economies in the world will report their respective trade balances this week, with investors keen to see if global trade remains resilient. The cost of shipping across the Pacific has been trending lower over the last several months, raising concerns of slowing global economic growth. The U.S. trade deficit is expected to expand, while China's trade surplus is expected to grow. However, the U.S. is expected to see growing imports, while China is forecast to have slowing imports, suggesting that the resilience in the U.S. economy isn't spilling over to the rest of the world.

USDCNH has weakened above the 7 mark PBOC has been defending at times, continuing a rally that began in January '23. With an evident divergence, traders will look forward to confirmation from Chinese imports. If imports come in better than expected, the pair could again head towards the 7 barrier, exposing 6.8950. On the other hand, a softer imports figure could set the tone for an extension towards 7.2592.

Tradingview Chart: U.S. Dollar / Chinese Yuan

RBA Expected to Hike, But Doubts Are Growing

The RBA paused its rate hikes in April but quickly had to restart as inflation turned around to rise. Inflation is still hot and above expectations, leading economists to expect another rate hike. Wages have also continued to grow, suggesting that inflation might become more entrenched. There is always the possibility that the RBA might split the difference and hike by only 15bps, as worries around economic growth abound.

With Aussie having priced in some of the hike narrative already, coming to reclaim the 66-cent barrier, trades will want to focus on whether the RBA goes for 25bps and leaves the door to more hiking open or chooses the conservative and more dovish path of raising only by 15bps. In the former event, AUD/USD could continue its ascend, boosted by momentum divergence, and attempt 0.67 and 0.6825. Conversely, perceived dovishness could see prices pull back to 0.6457, with 0.6561 and 0.6490 offering respite.

Tradingview Chart: Australian Dollar / U.S. Dollar

U.S. Treasury to Resume Bond Auctions

With the debt ceiling suspended, the U.S. Treasury can return to increasing its debt. The Treasury General Account (TGA) was depleted to near-record low levels in the run-up to the deal, with "extraordinary" measures taken to reduce cash flow. It's estimated that the Treasury will need up to $700B in new debt to return to the cash position it had before putting a hold on new debt issuance after the debt ceiling was reached back in January. With the Fed withdrawing $90B a month in liquidity, there will be extra focus on how the market handles the increase in the supply of Treasury instruments and how that might affect yields and, by extension, the dollar. The Treasury will publish a revised debt issuance schedule today, Monday.

The impact of the increase in Treasury supply on the dollar is uncertain as it will primarily depend on whether the Fed issues more debt or less debt - respectively - unless the event turns up being more risk averse, with the dollar supported regardless. However, USD/JPY has revealed a strong divergence between prices and momentum, with 140 holding the line, potentially triggering a downward leg towards 138.00. Any upside could see the pair extend to 142.31.

Tradingview Chart: U.S. Dollar / Japanese Yen

Top Events in Review

• U.S. debt ceiling deal passed through Congress ahead of schedule, supporting risk appetite and pushing up U.S. equities indexes.

• European inflation was slightly lower than expected, but ECB President Christine Lagarde comments that the data didn't change the outlook on rates supported the Euro.

• Japanese regulators talked up the need to keep the yen from depreciating, with the currency solidifying through the week.

• Crude prices declined at the start of the week on disappointing China PMIs and a stronger dollar but gave back some of the gains towards the end of the week, with the dollar weaker and ahead of the now finalised OPEC+ meeting over the weekend.

Major Calendar Events 05-09 /06(GMT)

Source: investing.com

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