Market Briefing: Geopolitical tension & macro risks

• Market wobbles. Geopolitical tensions underpin oil prices. Equities drift back. Run of weaker US data has weighed on USD. AUD near multi-week highs.

• Data pulse. Global PMIs in focus later this week. Australian jobs report also due (Thurs). Data might challenge (or reinforce) markets RBA rate hike thinking.

Global Trends

• Geopolitical and macroeconomic crosscurrents have generated more, albeit modest, gyrations across markets over the past few sessions. US equites drifted back overnight with the S&P500 (-0.5%) recording its third fall in the past six sessions, while long end bond yields ticked up. At ~4.72% the US 10yr is near the upper end of its 2-year range. Oil prices extended their climb with brent crude north of US$91/brl. In FX, the USD has generally been on the backfoot over the past week with a run of weaker than predicted US data, including a surprising contraction in US retail sales on Friday night, dampening expectations about a near-term Fed rate hike. Markets are pricing in a ~35% chance of a Fed hike at the September meeting, down from ~73% at the start of the month. EUR (now ~$1.1579) is hovering close to its ~6-month average, NZD (now ~$0.5901) is near multi-week highs, and AUD (now ~$0.7104) is around levels last traded in early-June.

• In terms of geopolitics, US/Iran tensions are showing no signs of letting up. Iranian TV indicated that an oil tanker had been seized in the Strait of Hormuz. This follows media reports Iran could take a more aggressive stance in the conflict . At the same time, President Trump proclaimed the US blockade was putting pressure on Iran, yet he isn’t interested in extending the expiring memorandum of understanding signed in June. As outlined previously, more bursts of volatility are possible over the period ahead as the situation continues to play out, and that the prolonged conflict is casting a long shadow over the global/Asian economy given the disruptions to energy supply.

• Economically, as our chart shows, the recent weakening in the US data pulse has come through at a time the rest of the world has improved. Data released yesterday showed momentum in China is holding on with the annual pace of growth across retail sales and industrial production on par with last month. Looking ahead, the US data calendar is fairly limited this week with the minutes of the last Fed meeting (Thurs morning AEST) and the global business PMIs (Friday AEST) due. In our opinion, more signs relative growth between the US and the rest of the world is swinging against the US might hold down the USD. However, at the same time, lingering issues in the Middle East and increase in the oil price works the other way given the US’ shift to being a ‘net energy exporter’.

Global event radar: JP CPI (Fri), Global PMIs (Fri), US PCE Deflator (26th Aug), Jackson Hole Symposium (27th-29th Aug)

Trans-Tasman Zone

• Despite the wobbles in a few risk assets over the past week, the softer USD on the back of a run of weaker US data and downward repricing in US Fed rate hike expectations has boosted the NZD and AUD (see above). At ~$0.5901 the NZD is above its 1-year average and at a multi-week high. The AUD (now ~$0.7104) has edged up to levels last traded in early-June with some relative strength on the cross-rates also providing a helping hand. The AUD has appreciated by ~0.2-0.4% versus the EUR, JPY, GBP, and CNH over the past 24 hours. AUD/EUR (now ~0.6135) is ~1% from its year-to-date peak and AUD/JPY (now ~113.28) has unwound the bulk of its recent Japanese intervention inspired dip.

• The ‘hawkish’ vibes from the RBA last week, which kept the door open to another rate hike this cycle, has boosted interest rate expectations with ~19bps of tightening factored in by next February. We think this might be challenged this week by the jobs report (Thursday AEST). As mentioned before, the Australian labour market data can be volatile month-to-month, and the July figures may be impacted by a few forces. After a strong showing last month there might be some cooling in momentum given the sluggishness in the underlying Australian economy. Added to that, school holidays coincided with the survey reference week and this could also impact the results. On net, we believe a weaker than anticipated Australian jobs report may dampen the markets enthusiasm about the chances of another RBA rate rise. Increased labour market slack is typically the price that needs to be paid to get inflation back down to where it needs to be.

• If realised, we believe an adjustment in Australian interest rate expectations could take some of the heat out of the AUD, particularly as it is also looking stretched on technical indicators with the relative strength index close to ‘overbought’ levels. From our perspective, given the RBA appears closer to the end than the beginning of its tightening cycle, while other central banks have room to run, the AUD’s upside potential from here could be constrained. Moreover, we believe macro headwinds for the AUD remain. The list includes the unfolding slowdown in Australian economic growth, lingering issues for global/Asian growth because of energy supply, and valuation worries across AI/tech stocks.

AUD & NZD event radar: AU Jobs (Thurs), JP CPI (Fri), Global PMIs (Fri), AU CPI (26th Aug)

AUD levels to watch (support / resistance): 0.7020, 0.7060 / 0.7130, 0.7190

NZD levels to watch (support / resistance): 0.5830, 0.5870 / 0.5930, 0.5970

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

TUESDAY (18th August)

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

GBP Jobs Report (June/July) (4pm)

EUR Germany ZEW (Aug) (7pm)

EUR ECB’s Lane Speaks (9:45pm)

USD Housing Starts (July) (10:30pm)

USD Industrial Production (July) (11:15pm)

WEDNESDAY (19th August)

NZD PPI (Q2) (8:45am)

AUD Wages (Q2) (11:30am)

AUD RBA’s Hauser Speaks (12:45pm)

GBP CPI Inflation (July) (4pm)

THURSDAY (20th August)

USD FOMC Meeting Minutes (4am)

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

USD Initial Jobless Claims (10:30pm)

FRIDAY (21st August)

NZD Trade Balance (July) (8:45am)

AUD PMIs (Aug P) (9am)

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

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

GBP Retail Sales (July) (4pm)

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

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

EUR PMIs (Aug P) (6pm)

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

EUR Wages Indicator (Q2) (7pm)

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

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

*Note, all times/dates provided are AEST