The USD index has bounced off its lows, driven by the softer EUR. The US ten‑year continues to trade near the bottom of its 2014 range. US retail sales (Tuesday) and a speech by Fed Chair Yellen (Friday) are the US macro highlights. While US developments may cause some intra‑day volatility near‑term movements in the USD will be driven by ongoing reaction in the EUR to building expectations of future ECB policy easing and geopolitical tensions in the Ukraine. The USD should be supported near‑term, but over the medium‑term relatively lower US real interest rates and the US’ US$380 billion current account deficit should remain headwinds.
The Australian Federal Government Budget (Tuesday) is unlikely to have any lasting impact on the AUD. The budget should help underpin Australia’s AAA sovereign credit rating, at a time the transition in the domestic economy away from mining‑investment led growth is coming through. Expectations are that the Chinese economy picked up momentum in April (activity data due Tuesday) which should be AUD positive. It is expectedAUD/USD and selected AUD crosses (particularly AUD/EUR) to remain supported.
In Australian rates the highlight of the week is the Australian Federal Budget on Tuesday. A tight budget could lift expectations that the RBA is on hold for longer. There shouldn’t be a lasting impact in the rates market. Offshore developments such as tensions in the Ukraine remain a focus and should dominate moves in the long‑end.