Market Briefing: FX is a relative game
Watch the September edition of our APAC Monthly Roadmap series here.
Our latest FX Event Radar, Views In A Nutshell, & Seasonality Heatmap is here.
Words & actions. 'Hawkish' comments by the by BoJ Governor supported bond yields & the JPY. Authorities in China push back against CNY weakness.
AUD turn? Positive risk sentiment, better China credit data, & a softer USD stemming from a firmer JPY & CNY have given the AUD a boost.
Data flow. AU sentiment data released today with US CPI (Weds), AU jobs report, US retail sales, ECB meeting (all Thurs), & China data (Fri) due later this week.
In what is likely to be a busy week given the string of upcoming macro focal points, markets were a bit livelier than the usual Monday listlessness. Equities were firmer with the US S&P500 rising 0.7% overnight. The tech-focused NASDAQ outperformed (+1.1%) with upbeat comments regarding Tesla’s Dojo supercomputer (+10%) boosting the sector. Long-end bond yields ticked higher with the US 10yr rate (+2bps) nudging up to 4.29%, while oil steadied near the highest levels traded since mid-November (WTI crude is now ~US$87.30/brl).
Yesterday’s lift in Japanese bond yields following a relatively ‘hawkish’ weekend interview by Bank of Japan Governor Ueda cascaded through markets. The normally dormant JGB’s rose 4-5bps across the curve, with markets toying with the idea a pivot by the BoJ away from its ultra-accommodative stance could be on the horizon. The 10yr JGB yield traded above 0.7% for the first time in nearly 10-years. Governor Ueda stated that it’s possible the BoJ could have enough information by the year-end to judge if wages will continue to rise, a requirement to tighten policy with an ending of its negative interest rate regime an option. With core inflation in Japan north of 4%pa we think it is a matter of when, not if the BoJ normalises policy. We believe the BoJ’s yield curve control could be jettisoned as soon as the mid-October meeting.
Unsurprisingly the JPY strengthened. USD/JPY has dipped by ~0.8% (now 146.56) relative to Friday’s close. Policy divergence between the BoJ and other major central banks, which has underpinned JPY weakness, may be peaking. At current levels we think the JPY is quite undervalued. Given it is the second most traded currency pair the pull-back in USD/JPY weighed on the USD Index. EUR edged up to ~$1.0750, GBP is back over ~$1.25, and the AUD (now ~$0.6430) is near a 1-week high. Also helpful for the AUD, and dragging on the USD, was a turnaround in USD/CNY, the fourth most traded currency pair (-0.7% to ~7.29). Policymakers in China continue to push back against currency weakness with yesterday’s daily CNY fix set at a much stronger than expected level (the negative bias was a new record). The PBoC backed that up by saying participants should “avoid behaviours that disturb market orders such as conducting speculative trades”. Data wise, better than expected Chinese credit growth also supported sentiment.
Later this week US CPI (Weds), US retail sales (Thurs), ECB Meeting (Thurs), and China activity data (Fri) are due. FX is a relative price, and outcomes compared to expectations drive markets. With a ‘higher for longer’ Fed interest rate outlook well priced, and the gap between US and non-US data surprises now very wide, we think the USD may give back more ground if the incoming US releases underwhelm expectations, the China activity data exceeds rather downbeat predictions, and/or the ECB delivers another rate hike. Markets and analysts are evenly split as to whether it occurs this week.
Global event radar: US CPI (Weds), US Retail Sales (Thurs), ECB Meeting (Thurs), China Activity Data (Fri), US Fed Meeting (21st Sep), Bank of England Meeting (21st Sep), Bank of Japan Meeting (22nd Sep), Eurozone/US PMIs (22nd Sep), Eurozone CPI (29th Sep), China PMIs (30th Sep).
The AUD has had a bit of a spring in its step over the past 24hrs. Positive risk sentiment, as illustrated by the lift in equities, and a weaker USD on the back of the firmer JPY and CNY (see above), have pushed AUD/USD up to ~$0.6430 (near a ~1-week high). The AUD has also outperformed most of the major crosses with gains of 0.3-0.6% against the EUR, JPY, GBP, and CAD compared to this time yesterday. AUD/NZD (now ~1.0861) has ticked up towards the top of its ~1-month range.
As mentioned, in addition the to CNY reversal, the latest credit data out of China was better than expected. After a weak July new loans and aggregate financing rebounded in August with the policy push aimed at reinvigorating activity a driver. In our opinion, the credit data, combined with the improvement in manufacturing PMI, and smaller contractions in import and export growth suggests that China’s growth pulse may be bottoming out, particularly as more supportive policy measures have been rolled out, and with government bond issuance picking up. The latter normally foreshadows greater infrastructure investment, which tends to be a positive for commodity demand and in time the AUD.
Locally, September consumer sentiment (10:30am AEST) and August business conditions (11:30am AEST) are released today. The data may generate some intra-day volatility, but we expect the upcoming US CPI (Weds), Australian jobs report (Thurs), US retail sales (Thurs), the ECB meeting (Thurs), and the China activity data (Fri) to have a bigger influence on the AUD. As discussed over the past week, down near current levels we think a lot of negatives have been factored into the AUD, and that there looks to be a lot of positivity priced into the USD. On balance, we think the incoming global and domestic economic releases could see the AUD’s recovery continue.
In the US, we see risks that US core inflation and US retail sales disappoints. If realised, this could see markets trim their elevated US interest rate expectations, which in turn may exert more pressure on the USD. This could be compounded by another rate rise by the ECB, further gains in the JPY as markets discount a turn in BoJ policy, and/or more signs that growth momentum in China is stabilising. Locally, employment is predicted to snap back (mkt +25,500), with the unemployment rate (now 3.7%) at risk of falling. Last month the ABS noted that July included school holidays and that there has been a change around when people take leave or start a new job. This pattern was last seen in May, with the weak result more than unwinding the following month. A solid jobs report could question the markets view that the RBA hiking cycle is over, generating some AUD support, in our view.
AUD event radar: US CPI (Weds), AU Jobs (Thurs), US Retail Sales (Thurs), ECB Meeting (Thurs), China Activity Data (Fri), US Fed Meeting (21st Sep), Bank of England Meeting (21st Sep), Bank of Japan Meeting (22nd Sep), Eurozone/US PMIs (22nd Sep), AU CPI (27th Sep), AU Retail Sales (28th Sep), Eurozone CPI (29th Sep), China PMIs (30th Sep).
AUD levels to watch (support / resistance): 0.6320, 0.6360 / 0.6547, 0.6576
In line with the softer USD stemming from a stronger JPY and CNY (see above), USD/SGD (now ~1.3605) has lost some ground with the pair back down where it was trading mid last week. On the crosses, EUR/SGD (now ~1.4625) has whipped around over the past 24hrs, but on net it is little changed. By contrast, SGD/JPY (now ~107.70) is slightly lower with the pair ~0.5% below where it closed last week.
As discussed above and over the past week, we believe there are a lot of positives priced into the USD, and the weakness observed yesterday may extend. In our opinion, with a ‘higher for longer’ US Fed interest rate outlook discounted, and with the US' relative economic strength unlikely to continue, we think the USD is vulnerable to softer than anticipated data. This is where we think the risks reside for the upcoming US inflation (Weds), and especially the retail sales (Thurs) report. In our judgement, weaker than forecast US data, in conjunction with another potential ECB rate rise, the pricing in of a BoJ policy change, and/or further signs China’s growth momentum has found a floor, may exert more downward pressure on USD/SGD over the period ahead.
SGD event radar: US CPI (Weds), US Retail Sales (Thurs), ECB Meeting (Thurs), China Activity Data (Fri), US Fed Meeting (21st Sep), Bank of England Meeting (21st Sep), Bank of Japan Meeting (22nd Sep), Eurozone/US PMIs (22nd Sep), Singapore CPI (25th Sep), Eurozone CPI (29th Sep), China PMIs (30th Sep).
SGD levels to watch (support / resistance): 1.3400, 1.3453 / 1.3690, 1.3711
Currency Strategist - APAC
TUESDAY (12th September)
NZD Card Spending (Aug) (8:45am)
NZD Net Migration (July) (8:45am)
GBP BoE’s Mann Speaks (9am)
AUD Consumer Confidence (Sep) (10:30am)
AUD Business Conditions (Aug) (11:30am)
GBP UK Employment/Wage Data (July/Aug) (4pm)
EUR Germany ZEW Survey (Sep) (7pm)
USD NFIB Small Business Optimism (Aug) (8pm)
WEDNESDAY (13th September)
GBP Monthly GDP (July) (4pm)
EUR Eurozone Industrial Production (July) (7pm)
USD CPI Inflation (Aug) (10:30pm)
THURSDAY (14th September)
AUD Employment Report (Aug) (11:30am)
EUR ECB Policy Decision (10:15pm)
USD Retail Sales (Aug) (10:30pm)
USD PPI Inflation (Aug) (10:30pm)
USD Initial Jobless Claims (10:30pm)
EUR ECB President Lagarde Speaks (10:45pm)
FRIDAY (15th September)
NZD PMI – Manufacturing (Aug) (8:30am)
CNH Industrial Production (Aug) (12pm)
CNH Retail Sales (Aug) (12pm)
CNH Fixed Asset Investment (Aug) (12pm)
USD Industrial Production (Aug) (11:15pm)
SATURDAY (16th September)
USD Uni. of Michigan Sentiment (Sep P) (12am)
*Note, all times/dates provided are AEST
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