Market Briefing: Market swings continue
Oil jump. Another move higher in oil prices because of Middle East concerns dampened risk sentiment. Equities fell. USD firmer. AUD underperforms.
Macro worries. Higher energy prices pose an upside risk to inflation & downside risk to growth. More bouts of market & AUD volatility likely.
Global Trends
Market volatility related to developments in the Middle East and swings in the oil price continued overnight. This time sentiment soured once again with the US/Israel strikes on Iran showing little sign of easing after several days of conflict. Indeed, the conflict appears to be widening across the region with more nations reporting drone/missile attacks from Iran. At the same time officials from Iran warned attacks could intensify, and an oil tanker was bombed off the coast of Iraq. This is a fair distance from the Strait of Hormuz but illustrates how risky the situation still is.
Oil prices have risen again with Brent Crude tracking near ~US$84/brl. As our chart shows, this is the highest level since mid-2024, and ~43% above where brent crude prices were in mid-December. As discussed earlier in the week, the prospect of a simultaneous slowdown in growth and jump in inflation stemming from higher energy prices is raising ‘stagflation’ fears. Bond yields increased as central bank expectations were recalibrated. Another US Fed rate cut is now not fully factored in until September with traders also toying with the idea the European Central Bank hikes rates by year-end. European bond yields jumped up ~10-13bps across various curves while US rates rose by a more modest ~3-4bps. The shift in interest rate expectations and growth worries weighed on European/US equities with the major indices falling ~0.3-1.6% overnight. In FX, the USD strengthen, in line with the positive correlation to oil prices it now has given the US’s net energy exporter status, and because of safe-haven demand. EUR is hovering down around ~$1.16 (the bottom end of its ~3-month range), USD/JPY ticked up (now ~157.56), and growth linked currencies such as the NZD (now ~$0.59) and AUD (now ~$0.7010) underperformed.
Looking ahead, on top of the unfolding Middle East developments attention will also be given to the US retail sales and monthly jobs reports (tonight, 12:30am AEDT). A few US Fed members are also due to speak. A slowdown in employment growth is anticipated after a solid result last month. However, on net, we think signs of stabilization in US activity and/or labour market conditions might compound the shaky risk sentiment and help the USD extend its rebound, especially as it is still below our ‘fair value’ estimate.
Global event radar: US Retail Sales & Jobs (Tonight), US CPI (11th Mar), China Data (16th Mar), RBA (17th Mar), BoC (19th Mar), US Fed (19th Mar), BoJ (19th Mar), ECB (20th Mar)
Trans-Tasman Zone
The ongoing (and broadening) conflict in the Middle East, coupled with downside growth/upside inflation risks stemming from the increase in oil prices has supported the USD and weighed on cyclical currencies like the NZD (now ~$0.59) and AUD (now ~$0.7010). The AUD also underperformed on the cross-rates with falls of ~0.3-0.8% recorded against the EUR, JPY, GBP, NZD, CAD, and CNH. That said, crosses like AUD/EUR (now ~0.6041), AUD/JPY (now ~110.46), AUD/CNH (now ~4.8515), and AUD/NZD (now ~1.1883) remain at elevated levels and near the upper end of their respective cyclical ranges.
RBA Deputy Governor Hauser speaks on a panel at the US monetary policy forum tomorrow (5:30am AEDT), but outside of that the Australian economic calendar is limited over the period ahead with the next major event the 17 March RBA meeting. It is a similar story in NZ with Q4 GDP (19 March) the next top tier piece of economic news. Data released earlier this week showed the Australian economy had more momentum at the end of last year than the RBA was anticipating. GDP growth was running at 2.6%pa in Q4, its fastest annual pace in a few years. That said, consumption growth was a bit sluggish and productivity/price pressure measures improved. On balance, while the upcoming March meeting is “live” for a policy change (markets are pricing in a ~25% chance of another rate hike), we believe the more likely outcome is for the RBA to hold fire until the 5 May meeting as it gathers information on labour market/inflation trends and sees how the Middle East conflict is playing out.
As outlined over the past week, the situation in Middle East is fluid and more bouts of AUD (and broader market) volatility are probable over the near-term. While the prospect of further RBA rate rises and a shift up in the level of Australian interest rates should act as an AUD cushion, the negative external risk backdrop is more than an offsetting force. Moreover, with the AUD still above our model estimate (we see 'fair value' now closer to ~$0.6950), the negative growth/inflation implications for parts of Asia created by higher energy prices, the swing in positioning to being ‘net long’ AUD (as measured by CFTC futures contracts), and potential for the USD to recoup more lost ground, we remain of the view that there are more short-term downside risks for the AUD.
AUD & NZD event radar: US Retail Sales & Jobs (Tonight), US CPI (11th Mar), China Data (16th Mar), RBA (17th Mar), BoC (19th Mar), US Fed (19th Mar), NZ GDP (19th Mar), AU Jobs (19th Mar), BoJ (19th Mar), ECB (20th Mar)
AUD levels to watch (support / resistance): 0.6910, 0.6970 / 0.7040, 0.7110
NZD levels to watch (support / resistance): 0.5810, 0.5850 / 0.5940, 0.6010
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (6th March)
USD Fed's Goolsbee Speaks (11am)
EUR Germany Factory Orders (Jan) (6pm)
SATURDAY (7th March)
USD Retail Sales (Jan) (12:30am)
USD Jobs Report (Feb) (12:30am)
EUR ECB’s Cipollone Speaks (12:30am)
USD Fed's Daly & Paulson Speaks (2:15am)
EUR ECB’s Schnabel Speaks (4am)
AUD RBA’s Hauser Speaks (5:30am)
USD Fed’s Hammack Speaks (5:30am)
*Note, all times/dates provided are AEDT
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