Market Briefing: Mixed signals
Consolidation. Limited news flow overnight. US equities eased, while bond yields & USD ticked up. AUD hovering near 1-month average.
AU CPI. Monthly inflation indicator a bit higher than expected. Sticky core inflation & solid jobs market point to limited/gradual RBA easing.
RBNZ easing. As expected RBNZ cut rates again. Challenges point to more easing. But signs RBNZ nearing the end of the road supported NZD.
Global Trends
Following the burst of optimism earlier in the week on the back of improved US/EU trade deal expectations US markets backpedaled a bit overnight. News flow was light, and on net the S&P500 eased (-0.6%) after its ~2% gain yesterday. However, an upbeat update by megacap and AI leading tech stock Nvidia after the close may improve the mood during today’s Asian session. Elsewhere, bond yields ticked up with the benchmark US 10yr rate rising ~3bps (now ~4.48%) while European equivalents are 2-6bps higher. But that was more of a spillover from a soft debt auction and weaker demand in Japan yesterday rather than US or European macro events. In FX, the USD index edged up again with EUR dipping sub-$1.13 and USD/JPY hovering just below ~145. The firmer USD also exerted a little downward pressure on the AUD (now ~$0.6425) despite the upside surprise in the monthly Australian inflation figures. By contrast, NZD nudged up (now ~$0.5966) after the RBNZ delivered another 25bp rate cut but appeared to be more ‘neutral’ about the path ahead.
Going forward US trade developments may generate more bouts of volatility. ‘Tail risks’ look to have been clipped by the signals the US and other nations are open to striking deals. That said, a lot of water still needs to go under the bridge when it comes to the US’ large trading partners such as China and EU. In terms of the latter, overnight reports stated that EU officials have painted a bleak picture of the talks with the bloc likely to have to accept a higher US import levy as a minimum 10% “reciprocal” tariff looks set to remain in place.
Negative growth implications of the evolving US trade policy are starting to show up. Container shipping numbers to the US have declined, and as our chart shows US growth expectations have been pared back. The US’ relative economic strength, which was a source of USD strength over the past few years, is fading. We think this could remain in place over the longer-run. So, while the USD might drift a touch higher in the short-run as month-end portfolio rebalancing flows wash through, we believe upside should be limited and that the unfolding backdrop points to the USD trending lower over the medium-term.
Global event radar: US PCE Deflator (Fri), China PMIs (Sat), EZ CPI (3rd June), US ISM (3rd June), AU GDP (4th June), US Jobs (6th June)
Trans-Tasman Zone
The uptick in the USD on the back of softness in the major alternatives (i.e. EUR and JPY) has weighed on the AUD a bit more over the past 24hrs (see above). At ~$0.6425 the AUD is hovering near its 1-month and 1-year averages. The AUD's drift lower has come about despite an upside surprise in yesterday’s monthly Australian inflation data. The CPI indicator showed headline inflation holding steady at 2.4%pa in April, in contrast to consensus predictions looking for a moderation, while core CPI nudged up to 2.8%pa. The monthly series is an incomplete data set, although strength in categories such as new dwelling purchase prices and a few other things like travel and apparel again highlight that inflation challenges remain.
From our perspective, the stickiness in some areas of the CPI basket, coupled with the ongoing resilience in the Australian jobs market point to the RBA continuing to provide only limited and gradual interest rate relief. Markets are fully pricing in another RBA rate cut by August with just under three 25bp reductions baked in over the five remaining meetings of 2025. The more favourable domestic economic and RBA policy trends should, in our view, be AUD supportive against currencies such as the EUR, CAD, and CNH over time. In terms of AUD/USD, as mentioned above and yesterday, we believe downside US growth risks and shifting capital flow dynamics look set to weigh on the USD (and in turn support the AUD) over the medium-term.
NZD bucked the firmer USD trend and is tracking near ~$0.5966, just above the mid-point of its 1-year range. Yesterday, the RBNZ delivered another (widely expected) 25bp interest rate cut. This lowered the OCR to 3.25%, a long way from last year’s 5.5% peak. In the RBNZ’s view “spare capacity” remains in the local economy and global developments (i.e. tariffs and offshore policy uncertainty) are “expected to moderate New Zealand’s economic recovery”. The sluggish NZ economic backdrop has seen the RBNZ factor in a little more easing into its policy path (another 25bp cut is penciled in over the period ahead). However, as our chart shows, that is largely what was already discounted by markets.
Outcomes compared to expectations matter in markets, especially in the short-term. And with the RBNZ failing to exceed ‘dovish’ views (particularly with 1 member of the committee voting to keep rates on hold), the NZD has been supported. This may continue over the short-run, however over the medium-term, we believe the downshift in NZ interest rates and ongoing NZ growth challenges can cap NZD/USD upside and see the NZD give back ground against the AUD.
AUD & NZD event radar: US PCE Deflator (Fri), China PMIs (Sat), EZ CPI (3rd June), US ISM (3rd June), AU GDP (4th June), US Jobs (6th June)
AUD levels to watch (support / resistance): 0.6350, 0.6400 / 0.6460, 0.6520
NZD levels to watch (support / resistance): 0.5850, 0.5900 / 0.6040, 0.6090
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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