Market Briefing: Can the stronger USD last?

CalendarMarch 25, 2024
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  • Firmer USD. US equities consolidated, bond yields dipped, while the USD's upturn continued despite some better than expected European data.

  • Weaker CNH. A catalyst behind the USD strength was the weaker CNH. Given its tight correlation the lift in USD/CNH exerted more pressure on the AUD.

  • Event radar. US durable goods orders & the PCE deflator are due. There are also a few Fed speakers. Locally, the monthly CPI indicator & retail sales are released.

After a run of positive days US equities consolidated on Friday near record highs (S&P500 -0.1%). That said, over the week the S&P500 still rose 2.3%, its best weekly performance since mid-December. Bond yields fell (US 2yr rate -5bps to 4.59% and the 10yr declined ~7bps to 4.20%), while in FX the USD extended its upswing. Despite a better-than-expected Germany IFO (touched its highest since mid-2023 suggesting growth may be turning the corner), and UK retail sales (flat vs forecasts for a fall) EUR (now ~$1.0809) and GBP (now $1.2602) remain around their lows.

USD/JPY also continues to hover near the top of its cyclical range (now ~151.35) with markets still sceptical last week’s first interest rate hike by the Bank of Japan since 2007 has opened the door to further tightening. Elsewhere, CNH weakened, pushing USD/CNH up to its highest since mid-November (now ~7.2754) with a weaker than anticipated daily fixing rate on Friday bolstering speculation that after months of pushing back authorities might be open to further currency weakness to help support China’s economic recovery. Market attention will be on today’s CNY fix to see whether Friday’s decision was a one-off or the start of a trend. The USD strength and CNH weakness exerted downward pressure on the NZD and AUD. The NZD (now ~$0.60) dipped to its lowest level in ~4-months, while the AUD (now ~$0.6520) is down close to where it started March.

After last week’s busy central bank heavy period, things are a bit quieter on the economic front. It is a holiday shortened week with the Easter break on the horizon. Offshore, the economic highlights in the US are the latest read on durable goods orders (a guide to business capex) (Tues 11:30pm AEDT) and the PCE deflator (the US Fed’s preferred inflation gauge) (Fri 11:30pm AEDT). There are also a few US Fed members speaking, with attention likely to be Governor Waller’s outlook speech (Thurs 9am AEDT) and comments by Chair Powell (Sat 2:30am AEDT). Governor Waller is a leading voice on the FOMC. Comments that he hasn’t been swayed by the recent uptick in inflation and still foresees steady 'policy recalibration' later this year may take some of the heat out of the USD, especially as market reaction to the PCE deflator data and Chair Powell’s comments won’t fully come through until early next week due to the holidays. However, given the recent widening in US-non US bond yield differentials (see chart below), we don’t see the USD falling back too far near-term.


Global event radar: US PCE Deflator (Fri), US Fed Chair Powell Speaks (Sat), China PMIs (31st Mar), Japan Tankan (1st Apr), US ISM (2nd Apr), Eurozone CPI (3rd Apr), US Jobs Report (5th Apr), US CPI (10th Apr), Bank of Canada Meeting (10th Apr), ECB Meeting (11th Apr).


AUD corner

The AUD remained heavy into the end of last week with the firmer USD and weaker CNH (see above) exerting a bit more downward pressure. As outlined previously, the AUD and CNH have a fairly tight (inverse) correlation with a higher USD/CNH typically translating to a lower AUD/USD (see scatter chart below). At ~$0.6520 the AUD is ~1.8% below last Thursday’s post US Fed peak and back around where it started March. The AUD also slipped back on the major crosses, however outside of AUD/JPY (-1%) the net moves against the EUR, GBP, NZD, and CAD ranged from 0.2-0.4%. And despite Friday’s dip, crosses like AUD/GBP, AUD/NZD, AUD/JPY, and AUD/CNH still appreciated over the past week.

In addition to watching how authorities in China react to the weakness in CNH, and whether the daily fixing is used to push back on newfound ‘bearish’ speculative behaviour, this week there are a couple of local data points of interest. The February CPI indicator reading is due on Wednesday, and retail sales are released Thursday. As February is the second month of the quarter the CPI indicator it will have better coverage of the services side of the inflation basket. This is a focus for the RBA, and things like rising rents, firmer wages, and lift in education costs at the start of the new year could see the annual inflation rate re-accelerate by more than predicted (mkt 3.5%pa from 3.4%pa). ‘Swiftonomics’ may have also played a role with upward pressure on airfares and hotel prices due to tours by Taylor Swift and Pink possible. Similarly, spending on merchandise and hospitality during these concert tours may have given retail trade a boost, as would the extra trading day because of the leap year (mkt +0.4%).

In our opinion, a positive run of local economic data could reinforce thinking the RBA is set to lag its peers in terms of when it starts and how far it goes during the looming global interest rate cutting cycle. We think this diverging policy outlook between the RBA and others, and favourable shift in short-dated yield differentials, could help crosses such as AUD/GBP, AUD/NZD, and AUD/EUR grind higher, and also help the AUD claw back a little ground versus USD. Although, as mentioned, over the near-term a lot will depend on USD/CNH's direction of travel and the reaction by Chinese policymakers to the currency weakness.

AUD event radar: AU CPI (Weds), AU Retail Sales (Thurs), US PCE Deflator (Fri), US Fed Chair Powell Speaks (Sat), China PMIs (31st Mar), Japan Tankan (1st Apr), US ISM (2nd Apr), Eurozone CPI (3rd Apr), US Jobs Report (5th Apr), US CPI (10th Apr), Bank of Canada Meeting (10th Apr), ECB Meeting (11th Apr).

AUD levels to watch (support / resistance): 0.6480, 0.6500 / 0.6550, 0.6590


SGD corner

USD/SGD has risen over the past week, in line with the rebound in the USD after the relatively larger dovish turn by some of the European central banks late last week generated a widening in bond yield differentials in favour of the US. At ~1.3495 USD/SGD is up around mid-February levels. On the crosses, EUR/SGD has endured some modest intra-day volatility but it is currently tracking between its 100-day (~1.4558) and 200-day (~1.4594) moving averages. After rising to a new cyclical high following the markets lukewarm response to the Bank of Japan’s first rate hike since 2007, SGD/JPY drifted back towards the end of the week. However, at ~112.22 SGD/JPY remains high.

As mentioned above, the global attention this week will be on whether authorities in China lean against the CNH weakness or continue to fix the currency at a higher than forecast rate. The outcome will impact the near-term direction of the USD and other Asian currencies. Economically, the focus during this week’s holiday shortened week will be on US durable goods orders, the latest US PCE deflator print (this is the US Fed’s preferred inflation gauge), and appearances by a few US Fed members including Governor Waller and Chair Powell. In our opinion, the incoming information is likely to see the USD (and USD/SGD) remain supported over the near-term, with reaction to the PCE deflator and Chair Powell unlikely to come through until early next week due to the holiday period.

SGD event radar: Singapore CPI (Today), US PCE Deflator (Fri), US Fed Chair Powell Speaks (Sat), China PMIs (31st Mar), Japan Tankan (1st Apr), US ISM (2nd Apr), Eurozone CPI (3rd Apr), US Jobs Report (5th Apr), US CPI (10th Apr), ECB Meeting (11th Apr).

SGD levels to watch (support / resistance): 1.3390, 1.3430 / 1.3500, 1.3540


FX Moves


Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com


Upcoming Events

MONDAY (25th March)

SGD CPI Inflation (Feb) (4pm)

EUR ECB’s Holzmann Speaks (9:30pm)

USD Fed’s Bostic Speaks (11:25pm)

USD Chicago Fed Index (Feb) (11:30pm)

TUESDAY (26th March)

USD Fed’s Goolsbee Speaks (12:05am)

USD New Home Sales (Feb) (1am)

GBP BoE’s Mann Speaks (1:15am)

USD Dallas Fed Index (Mar) (1:30am)

USD Fed’s Cook Speaks (1:30am)

AUD Consumer Confidence (Mar) (10:30am)

NZD RBNZ’s Conway Speaks (3:30pm)

CAD BoC’s Rogers Speaks (11:15pm)

USD Durable Goods Orders (Feb P) (11:30pm)

WEDNESDAY (27th March)

USD House Prices (Jan) (12am)

USD Consumer Confidence (Mar) (1am)

USD Richmond Fed Index (Mar) (1am)

NZD Consumer Confidence (Mar) (8am)

AUD CPI Inflation – Monthly (Feb) (11:30am)

JPY BoJ’s Tamura Speaks (12pm)

EUR ECB’s Cipollone Speaks (8pm)

EUR Confidence Measures (Mar) (9pm)

THURSDAY (28th March)

USD Fed’s Waller Speaks (9am)

JPY BoJ Summary (March Meeting) (10:50am)

NZD ANZ Activity Outlook (Mar) (11am)

AUD Job Vacancies (Feb) (11:30am)

AUD Retail Sales (Feb) (11:30am)

CAD GDP – Monthly (Jan) (11:30pm)

USD Initial Jobless Claims (11:30pm)

FRIDAY (29th March)

USD Chicago PMI (Mar) (12:45am)

USD Pending Home Sales (Feb) (1am)

USD Kansas City Fed Index (Mar) (2am)

EUR ECB’s Villeroy Speaks (4:30am)

JPY Tokyo CPI Inflation (Mar) (10:30am)

JPY Industrial Production (Feb P) (10:50am)

USD PCE Deflator (Feb) (11:30pm)

SATURDAY (30th March)

USD Fed’s Daly Speaks (2:15am)

USD Fed Chair Powell Speaks (2:30am)

*Note, all times/dates provided are AEDT

Author

Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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