Market Briefing: AUD still on the backfoot

• Market wobbles. Inflation concerns & rising bond yields dampen sentiment. USD firmer. AUD & NZD underperform. AUD now ~2.2% from recent high.

• Data flow. UK CPI inflation out today. FOMC minutes due tomorrow. Australian labour report also out on Thursday. Will holiday timing impact the jobs data?

Global Trends

• After a brief respite there was another bout of ‘risk-off’ sentiment across markets overnight. Concerns about inflation and fiscal positions remain with oil prices elevated (brent crude is up at ~US$111/brl) and no real movement with respect to an end to the Middle East conflict or reopening of the Strait of Hormuz. In a continuation of his existing playbook President Trump warned he could wait a few days or until early next week before he gives Iran “another big hit”, but these threats have been heard (repeatedly) before. Markets look to be coming around to the view that a genuine offramp to the conflict may not be found quickly.

• The inflation impacts from the sustained jump in oil prices and disruptions to supply chains continue to see skittish markets adjust their interest rate outlook. A rate hike by the US Fed is almost fully priced in by January, while ~1-3 hikes are anticipated by the Bank of Canada, European Central Bank, Bank of England, Bank of Japan, RBNZ, and RBA by year-end. Bond yields rose with US rates climbing another ~7-8bps across the curve, and 10yr yields in Germany and UK edging up ~3-4bps. The US 30yr yield (now ~5.18%) is close to its highest point since 2007. As our chart shows, bond yields are a decent amount above where they started the year and this is spilling over into other asset classes. US equities dipped with the S&P500 shedding ~0.7%. In FX, the USD strengthened with EUR (now ~$1.1607) and GBP (now ~$1.3398) losing ground and USD/JPY nudging up (now ~159.07). Cyclical currencies like the NZD (now ~$0.5835) and AUD (now ~$0.7107) underperformed.

• Offshore, UK CPI inflation for April is released today (4pm AEST) and the minutes of the last US FOMC meeting are out tomorrow (4am AEST). The FOMC was split at the last meeting with respect to its view about maintaining an easing bias. Some relative ‘hawkish’ comments are possible from the minutes. This could reinforce views the next move by the US Fed might be a rate rise. On net, we continue to believe the mix of shaky risk sentiment and upward repricing in US rate expectations should be near-term USD supportive factors.

Global event radar: UK CPI (Today), Global PMIs (Thurs), JP CPI (Fri), RBNZ (27th May), US PCE (28th May), Germany CPI (29th May)

Trans-Tasman Zone

• The renewed wobbles across markets because of inflation worries/rising bond yields, and firmer USD, have exerted downward pressure on NZD and AUD (see above). At ~$0.5835 the NZD is at the bottom of its multi-week range and below its 1-year average, while the AUD (now ~$0.7107) is at the lower end of the range occupied since mid-April. The backdrop also weighed on the AUD cross-rates. The AUD shed ~0.2-0.8% against the EUR, JPY, GBP, NZD, and CNH over the past 24hrs.

• When speaking yesterday RBA Assistant Governor Hunter noted the Board is “more worried about inflation expectations than in the past” and that “petrol isn’t the only price that matters for expectations”. That said, the minutes of the May meeting also indicated that the rate hikes pushed through gave them “space to see how the conflict in the Middle east develops and Australian households and businesses respond”. Expectations the RBA could deliver another hike in June have been trimmed (now assigned a ~15% chance), though more tightening down the track is still anticipated with another rise factored in by September and ~36bps of tightening discounted by March. But FX is a relative price, and as outlined above and shown in the chart below, other central banks are also predicted to shift rates higher over time and the spread with the RBA may have peaked.

• As mentioned previously, we believe it could be hard for the RBA to be more 'hawkish' than what is already baked into the interest rate curve. On top of that, we don’t think the looming slowdown in Australian economic activity because of higher interest rates and fuel costs has been accounted for, neither have the challenges set to be faced by the global/Asian economy from the prolonged Middle East conflict. ~80-90% of the energy shipped via the Strait of Hormuz is sent to Asia and other materials important to produce semi-conductors are also impacted. Given the ‘net long’ skew in positioning (as measured by CFTC futures) and overvaluation (the AUD is still ~1% above our ‘fair value’ estimate) we feel the reversal in the AUD has room to extend a bit further.

• Looking ahead, this week in Australia the monthly labour force report is due (Thursday). We think there is a chance the data undershoots predictions due to potential distortions. The survey reference week coincided with school holidays and an earlier Easter. Typically, these types of issues have tended to see employment weakening. Consensus is looking for employment to rise ~15,000 in April and for the unemployment rate to hold steady at 4.3%. A weaker report might see markets temper some of their RBA rate hike bets.

AUD & NZD event radar: UK CPI (Today), AU Jobs (Thurs), Global PMIs (Thurs), JP CPI (Fri), RBNZ (27th May), AU CPI (27th May), US PCE (28th May), Germany CPI (29th May)

AUD levels to watch (support / resistance): 0.7050, 0.7090 / 0.7140, 0.7180

NZD levels to watch (support / resistance): 0.5780, 0.5810 / 0.5860, 0.5890

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

WEDNESDAY (20th May)

GBP CPI Inflation (Apr) (4pm)

USD Fed’s Barr Speaks (11:15pm)

THURSDAY (21st May)

USD FOMC Minutes (4am)

AUD PMIs (May P) (9am)

JPY PMIs (May P) (10:30am)

AUD Jobs Report (Apr) (11:30am)

EUR France PMIs (May P) (5:15pm)

EUR Germany PMIs (May P) (5:30pm)

EUR PMIs (May P) (6pm)

GBP PMIs (May P) (6:30pm)

EUR ECB’s Villeroy Speaks (7pm)

GBP BoE’s Taylor Speaks (10pm)

USD Initial Jobless Claims (10:30pm)

USD Philly Fed Outlook (May) (10:30pm)

USD PMIs (May P) (11:45pm)

FRIDAY (22nd May)

USD Fed's Barkin Speaks (2:20am)

NZD Retail Sales (Q1) (8:45am)

JPY CPI Inflation (Apr) (9:30am)

GBP Retail Sales (Apr) (4pm)

EUR ECB’s Lane Speaks (4:15pm)

EUR Germany IFO (May) (6pm)

EUR ECB Pres. Lagarde Speaks (6:30pm)

EUR ECB Wages Indicator (Q1) (7pm)

EUR ECB’s Vujcic, Kazimir, Muller Speak (9:30pm)

CAD Retail Sales (Mar) (10:30pm)

SATURDAY (23rd May)

USD Fed’s Waller Speaks (12am)

*Note, all times/dates provided are AEST