Market Briefing: Let's make a deal (round #5)

• Positive vibes. Markets optimistic about an end to the US/Iran conflict. Oil lower, USD softer. NZD outperforms. AUD touched a fresh multi-year high.

• Twists & turns. Spillovers from the conflict set to be with us for a while. RBA rate hikes will weigh on growth. US jobs report could generate FX vol.

Global Trends

• Markets have remained in a positive state of mind with hopes of an end to the conflict in Iran underpinning risk sentiment. Reports indicate the US has offered Iran a memorandum of understanding that could end the conflict, reopen the Strait of Hormuz, and lift the US blockade on Iranian ports, with talks on Iran’s nuclear program to follow. Is this another false start? Time will tell, but ‘glass half full’ markets have latched on to it. Oil prices have fallen with brent crude down ~8% to be near ~US$102/brl. Better than it was a week ago when brent crude spiked to ~US$125/brl, however prices are still high from a historical perspective and problematic for the global economy.

• The upbeat mood filtered through to other asset classes with equities powering ahead. European stocks rose ~2-3% and the US S&P500 (+1.5%) reached another record high. Bond yields dipped as lower energy prices eased inflation pressures. In FX, the USD lost ground. In addition to the lower oil prices and reduced safe haven demand, yesterday’s decline in USD/JPY (now ~156.29) during the Asian session has seen participants speculate Japanese authorities have waded back into markets to intervene once again. The EUR rose (now ~$1.1751), as did GBP (now ~$1.3594), while AUD strengthened to a fresh multi-year peak (now ~$0.7238) and NZD outperformed (now ~$0.5955).

• Given all the twists and turns that have taken place already with respect to the Middle East, more headline driven volatility wouldn’t be a surprise. More broadly, in our opinion, the conflict might only be ‘phase 1’ with the spillover effects on supply chains and energy set to cast a long shadow on the world economy. This could impact risk appetite and cyclical currencies such as the AUD, NZD, and Asian FX over the months ahead. In the short-run, in addition to Middle East developments, the US labour market will be in focus with Challenger job cuts (7:30pm AEST) and non-farm payrolls (Fri night AEST) due. US non-farm payrolls have swung around the past few months, and based on the zigzag pattern a softer read is predicted by analysts after a strong March (mkt +62,000 in April). In our opinion, the signals from leading indicators and re-acceleration in US growth in Q1 suggest the risks are tilted to the US jobs report coming in stronger than forecast. If realised, we think this may reinforce thinking the US Fed will stay on hold (or may need to hike rates) which in turn might give the beaten down USD a bit of a boost.

Global event radar: US Jobs (Fri), US CPI (12th May), US Retail Sales (14th May)

Trans-Tasman Zone

• The positive market tone stemming from optimistic views about the US/Iran conflict, coupled with a softer USD and further reaction to this week’s RBA rate hike have propelled the AUD to a multi-year high (now ~$0.7238) (see above). The NZD has also jumped higher with yesterday’s solid NZ jobs report bolstering the case that the next move by the RBNZ should be a rate hike sometime later this year. That said, in terms of the AUD cross-rates it hasn’t been one-way traffic. The AUD has strengthened against the EUR (now ~0.6161), GBP (now ~0.5324), and CNH (now ~4.9307, the top end of its multi-year range), but lost ground versus the JPY (now ~113.13) and NZD (now ~1.2154).

• The upbeat risk sentiment about the outlook for the US/Iran conflict is currently underpinning cyclical currencies like the AUD, NZD, and Asian FX. But as mentioned above, the end of the conflict may only be the first part of the story. Returning oil/energy production, as well as sea freight via the Strait of Hormuz, to where it was before the conflict kicked off could take months/quarters, not days/weeks. The hit to supply chains and energy might effect the world economy for some time, particularly Asia given this is where ~80-90% of the energy sent via the Strait of Hormuz is sent. This will add to the challenges faced by the Australian economy which will also be impacted by the jump in fuel costs and higher interest rates. Indeed, under its baseline scenario (which looks to be at the optimistic end of the scale), the RBA is projecting GDP growth to slow to crawl (down to ~1.3%pa by late-2026, which is effectively the pace the population is forecast to expand).

• For the AUD, the improvement in risk appetite and weaker USD are near-term supports. However, looking ahead, more headwinds than tailwinds could be forming, in our opinion. The interest rate curve is factoring in another ~32bps of RBA tightening by next February. We believe it might be difficult for the RBA to be more 'hawkish' than what is already priced in. By contrast, we don’t feel the slowdown in private sector activity has been accounted for, neither have the challenges set to be faced by the global/Asian economy from the Middle East conflict. Moreover, with positioning (as measured by CFTC futures) ‘net long’, a lot of positives baked in (the AUD is tracking ~2-3% above our ‘fair value’ estimate), and the elevated starting point, there could be more medium-term downside than upside potential for the AUD. Indeed, as our chart shows, the upswing in the AUD so far this year has outpaced and recently moved counter to the shift in relative interest rate differentials.

AUD & NZD event radar: US Jobs (Fri), US CPI (12th May), US Retail Sales (14th May)

AUD levels to watch (support / resistance): 0.7110, 0.7170 / 0.7280, 0.7360

NZD levels to watch (support / resistance): 0.5870, 0.5910 / 0.5990, 0.6020

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

THURSDAY (7th May)

AUD Trade Balance (Mar) (11:30am)

EUR Germany Factory Orders (Mar) (4pm)

EUR ECB’s Kocher Speaks (4:45pm)

EUR ECB’s Villeroy & Guindos Speak (5:15pm)

USD Challenger Job Cuts (Apr) (9:30pm)

USD Initial Jobless Claims (10:30pm)

EUR ECB’s Lane Speaks (10:40pm)

FRIDAY (8th May)

EUR ECB’s Schnabel Speaks (3am)

USD Fed's Kashkari Speaks (3am)

USD Fed’s Hammack Speaks (4:05am)

USD Fed’s Williams Speaks (5:30am)

JPY Labor Cash Earnings (Mar) (9:30am)

EUR Germany Industrial Production (Mar) (4pm)

EUR ECB’s Guindos Speaks (5:05pm)

USD Fed’s Cook Speaks (7:45pm)

USD Jobs Report (Apr) (10:30pm)

CAD Jobs Report (Apr) (10:30pm)

SATURDAY (9th May)

USD Uni. of Michigan Sentiment (May P) (12am)

USD Fed’s Goolsbee, Waller, Bowman, Daly Speak (9:30am)

CNY Trade Balance (Apr) (no set time)

*Note, all times/dates provided are AEST