Market Briefing: BoJ & US data in focus
Improved sentiment. Equities & bond yields higher overnight. The more upbeat risk appetite has supported the AUD in otherwise quiet FX markets.
US data flow. Topline US GDP growth undershot forecasts, but this was because of inventories. Price measures remain high. The ECI & PCE deflator due tonight. The US Fed still has more work to do to tame inflation.
BoJ in focus. Inflation & wage pressures in Japan are building. It appears inevitable the BoJ shifts course. Could the first steps be taken today?
Sentiment improved overnight, with equities and bond yields higher. In the US, the S&P500 rose ~2%, with strong earnings from the mega cap tech firms and less worry about the banking sector supporting markets. US bond yields also increased, with yields up ~7-12bps across the curve, though this was more a reflection of the elevated inflation readings within the US GDP report (see below) which is pointing to the US Fed still having more work to do. The policy driven US 2-year yield is back up at 4.07%, with probabilities of another 25bp hike by the US Fed next week rising to ~90%, and pricing for cuts later this year pared back. In FX, the USD was whipped around intra-day by the US data, and on net is marginally higher compared to this time yesterday. EUR (~58% of the USD Index) eased slightly, while AUD and NZD notched up modest gains on the back of the more upbeat market tone.
Data wise, US GDP rose less than expected in Q1, with the economy expanding at a 1.1% annualized pace. However, the topline miss reflected a large inventory drawdown. Domestic demand remains solid, with consumer spending (the largest part of the US economy) still firing. Importantly, the price components were also stronger than anticipated, indicating that inflation remains sticky and at uncomfortable levels for policymakers. The GDP price measures point to upside risks to today’s monthly PCE deflator (10:30pm AEST). The PCE deflator is the Fed’s preferred inflation gauge. Also out today is the quarterly Employment Cost Index (10:30pm AEST). This is a broad measure of wages which the Fed keeps a close eye on. The US labour market tightness suggests the ECI should remain well above levels consistent with the Fed’s inflation target. As our chart shows, there has been some loosening, but there is still ~1.7 job vacancies for each unemployed person in the US. The Fed is looking for this ratio to get down to ~1. We think high ECI and/or PCE readings are likely to solidify near-term Fed rate hike pricing and see rate cut expectations trimmed back further, giving the USD some support.
Today's Bank of Japan meeting, the first for new Governor Ueda, is a potential source of volatility (no set time for announcement). Inflation and wage pressures in Japan are building, and we think it is inevitable the BoJ winds back its loose settings. We believe large adjustments are more likely towards mid-year rather than today, however, a tweak or an announcement of a ‘review’ can’t be ruled out. Expectations for a change today appear low, so a ‘surprise’ would trigger a bout of JPY strength, and this would flow through FX markets given the moves in USD/JPY and on the JPY crosses.
Global event radar: Bank of Japan Meeting (Today), US Employment Cost Index (Tonight), China PMI (Sun), RBA Meeting (2nd May), Eurozone CPI (2nd May), ECB Meeting (4th May), US Fed Meeting (4th May), Fed Chair Powell Speaks (4th May), US Jobs Report (5th May), US CPI (10th May), Bank of England Meeting (11th May), US Retail Sales (16th May).
AUD has ticked up slightly over the past 24hrs, rising by ~0.4% to ~$0.6630. The AUD has tracked the improvement in risk appetite, with offshore equity markets and oil prices rising overnight. We are doubtful that the AUD’s rebound will extend much further in the near-term. Fundamentally, a range of factors continue to move against the AUD. Global growth is slowing. This is dampening commodity demand, and should keep prices on the backfoot, in our view.
On the USD side of the story, as discussed above, while topline US GDP growth undershot expectations, consumption (the engine room of domestic demand) remains solid and price pressures are still elevated. This points to further Fed policy action, with market pricing looking for rate cuts later this year at risk of unwinding. We believe there are upside risks to today’s US Employment Cost Index and PCE deflator data (10:30pm AEST). Stronger wage/inflation data should, in our view, solidify further near-term Fed rate hikes and see expectations for future cuts pared back. And when combined with our expectation that the RBA will continue to keep policy on hold, the shift in yield differentials should weigh on the AUD.
A wildcard to this near-term view is today’s Bank of Japan announcement (no set time). We think changes to BoJ policy are coming, but our base case is for the adjustments to occur towards mid-year. A ‘surprise’ today would trigger a drop in USD/JPY (and support the JPY on the crosses), and this USD impact would cascade across FX markets.
Although we think the AUD will continue to face an uphill battle over the next few months, we would also caution against becoming overly bearish down around current levels. While the AUD may not rebound quickly, it may not fall that much further either. The very high level of Australia’s terms of trade and shift to a current account surplus (now ~1% GDP) are underlying sources of AUD support. And as our chart shows, statistically, the AUD hasn’t spent much time below current levels over recent years. Since 2015 the AUD has only traded at $0.65 or lower ~3% of the time (grey bars).
AUD event radar: Bank of Japan Meeting (Today), US Employment Cost Index (Tonight), China PMI (Sun), RBA Meeting (2nd May), RBA Gov. Lowe Speaks (2nd May), AU Retail Sales (3rd May), ECB Meeting (4th May), US Fed Meeting (4th May), US Jobs Report (5th May), US CPI (10th May), Bank of England Meeting (11th May), US Retail Sales (16th May), AU Wages (17th May), AU Jobs Report (18th May), RBNZ Meeting (24th May).
AUD levels to watch (support / resistance): 0.6525, 0.6565 / 0.6703, 0.6738
USD/SGD has continued to consolidate around ~$1.3350, with a modestly firmer USD Index offsetting the more positive risk sentiment (see above). Our view continues to be that USD/SGD can edge up towards to the top of its ~$1.3150-1.3450 range over the period ahead, and for the SGD to underperform the EUR and JPY. Broadly speaking, a slow down in global growth, combined with further policy tightening by the US Fed and ECB should favour currencies like the USD and EUR over ones like the SGD which are tethered to the global economic cycle.
As outlined above, during today’s Asian session, the Bank of Japan policy decision is due. We think it is a matter of time before the BoJ starts to unwind its very accommodative policy measures. We don’t expect large changes today, but the odds, in our view, aren’t zero. Over time, we think the change in the BoJ’s policy stance and the improvement in Japan’s capital flow dynamics should be JPY supportive. In the US, the Employment Cost Index and PCE deflator are released tonight. In our opinion, risks appear tilted to stronger than expected wage/inflation data. If realised, we expect USD/SGD to be boosted by a lift in near-term US Fed rate hike expectations and a further reduction in rate cut pricing that has been baked in for later this year.
SGD event radar: Bank of Japan Meeting (Today), US Employment Cost Index (Tonight), China PMI (Sun), RBA Meeting (2nd May), Eurozone CPI (2nd May), ECB Meeting (4th May), US Fed Meeting (4th May), US Jobs Report (5th May), US CPI (10th May), Bank of England Meeting (11th May), US Retail Sales (16th May), Singapore CPI (23rd May).
SGD levels to watch (support / resistance): 1.3200, 1.3290 / 1.3420, 1.3490
Currency Strategist - APAC
FRIDAY (28th April)
JPY Bank of Japan Policy Meeting (no set time for announcement)
JPY Industrial Production (Mar) (9:50am)
EUR France GDP (Q1) (3:30pm)
EUR Spain GDP (Q1) (5pm)
EUR Germany & Italy GDP (Q1) (6pm)
EUR Eurozone GDP (Q1) (7pm)
EUR Germany CPI Inflation (Apr) (10pm)
USD Employment Cost Index (Q1) (10:30pm)
USD Personal Income & Spending (Mar) (10:30pm)
USD PCE Deflator (Mar) (10:30pm)
CAD Monthly GDP (Feb) (10:30pm)
USD Chicago PMI (Apr) (11:45pm)
*Note, all times/dates provided are AEDT