Market Briefing: No new tariff news is good news
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Market swings. US equities ticked up while bond yields fell. This weighed on the USD. AUD & NZD continue to recover lost ground.
Data flow. US ADP employment improved but the services ISM declined. Non-farm payrolls released on Friday night. BoE rate cut expected tonight.
Stronger JPY. Wages in Japan accelerated. More BoJ rate hikes anticipated. This is JPY supportive. We see more AUD/JPY downside over medium-term.
Global Trends
In the absence of new US tariff related developments there has been a mixed performance across markets overnight. US equities swung around but on net ended the session in positive territory (S&P500 +0.4%) as macro factors outweighed underwhelming earnings results across the tech sector. Elsewhere, bond yields fell back with curves flattening due to larger relative moves in long-end rates. The US 2yr yield declined ~3bps (now 4.19%, the bottom end of its multi-week range), while the US 10yr yield shed ~8bps (now ~4.43%, close to 40bps below its mid-January cyclical peak). Bond yields across the Eurozone also dipped, though by a smaller margin than the US.
Patchy US economic data and relief there weren’t any surprises in the latest US Treasury refinancing plans dragged on bond yields. There had been some concern that the new US Treasury Secretary may change strategy and announced greater issuance of longer-dated US debt. In terms of the US data, although ADP employment picked up the ISM services index (a gauge of activity for the economically significant services sectors) lost ground. Activity and new orders declined, as did prices paid which is an inflation guide. Odds of further US Fed interest rate cuts have nudged up, though only 1 move is factored in by July with a second discounted by next January.
The pull-back in US yields weighed on the USD. As our chart shows, the USD has been moving in locked-step with longer-term US interest rate expectations. EUR is hovering just above ~$1.04, and GBP is near ~$1.25 ahead of tonight’s Bank of England decision (11pm AEDT). Another BoE rate cut is almost fully priced in, but given stubborn UK inflation a measured approach is anticipated further ahead. USD/JPY tumbled ~1% to be at levels last traded in mid-December (now ~152.70). In addition to lower global bond yields, the JPY also garnered support from reinforced expectations the Bank of Japan is on a different path and should raise rates further after data showed Japanese wage growth is re-accelerating. Closer to home, the more positive vibes and softer USD have supported the NZD (now ~$0.5686) and AUD (now ~$0.6285).
As discussed previously, we think markets will remain subject to tariff-related headline risk for a while. But as seen the last few days, on the proviso there is no new negative tariff stories, we believe the USD should continue to drift lower. A lot of positives appear to be baked into the USD at such high levels. We believe more signs the US labour market is losing steam (non-farm payrolls is due Friday night) could exert pressure on US yields.
Global event radar: BoE Meeting (Tonight), US Jobs (Fri night), US CPI (13th Feb), US Retail Sales (15th Feb), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
Trans-Tasman Zone
After being battered and bruised earlier in the week the AUD and NZD have continued to pick themselves up from the canvas as the USD has come under pressure (see above). At ~$0.5686 NZD is at a 2-week high. The AUD (now ~$0.6285) is above of its ~1-month average and over 3% from the lows touched during Monday’s upheaval. The AUD has also ticked up on a few of the major crosses with gains of 0.3-0.5% recorded versus the EUR, GBP, CAD, and CNH over the past 24hrs. By contrast, AUD/NZD consolidated (now ~1.1055), and AUD/JPY has remained on the backfoot. The firmer JPY stemming from rising expectations the Bank of Japan has more work to do to cool inflation is inline with our thinking. We see a bit more downside in AUD/JPY over the medium-term.
The local data calendar remains quiet with the 18 February RBA decision the next major domestic focal point. The start of the RBA’s rate cutting cycle is largely priced in given a 25bp reduction is ~93% discounted. That doesn’t mean it will be smooth sailing for the AUD until them. More bursts of volatility should be expected over the period ahead as US tariff risks continue to play out and headlines hit the wires.
However as we mentioned before, what's important for markets isn’t if something is ‘good’ or ‘bad’ but rather if it is ‘better’ or ‘worse’ than what is anticipated. Based on this framework, although volatility is likely, we continue to think downside potential in the AUD should be constrained. This is because: (a) the AUD is already trading at a discount to fundamentals (it is tracking ~4 cents below our ‘fair value’ models); (b) sentiment is skewed negatively (‘net short’ AUD positioning, as measured by CFTC futures, is elevated): (c) the AUD has not sustainably trading much below where it is over the past decade (the AUD has only been sub-$0.62 ~1% of the time since 2015); (d) we believe any tariff induced export headwinds in China are likely to be counteracted via steps to boost commodity-intensive infrastructure investment. This is where Australia’s exports are plugged into; and (e) Australia’s export basket is tariff-insulated given its minimal manufacturing and with it running a trade surplus with the US. In our opinion, these forces should help the AUD outperform currencies like the EUR, CAD, NZD and CNH. Indeed, as the blue bars in our chart illustrates, this has already been the case with the AUD strengthening against most currencies so far this year.
AUD & NZD event radar: BoE Meeting (Tonight), US Jobs (Fri night), US CPI (13th Feb), US Retail Sales (15th Feb), RBA Meeting (18th Feb), RBNZ Meeting (19th Feb), Global PMIs (21st/22nd Feb)
AUD levels to watch (support / resistance): 0.6200, 0.6250 / 0.6330, 0.6370
NZD levels to watch (support / resistance): 0.5590, 0.5650 / 0.5720, 0.5760
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
THURSDAY (6th February)
USD Fed’s Jefferson Speaks (11:30am)
AUD Trade Balance (Dec) (11:30am)
JPY BoJ’s Tamura Speaks (12:30pm)
EUR Germany Factory Orders (Dec) (6pm)
USD Fed’s Waller Speaks (6:30pm)
GBP Bank of England Decision (11pm)
FRIDAY (7th February)
USD Initial Jobless Claims (12:30am)
EUR ECB’s Nagel Speaks (3:15am)
USD Fed's Logan Speaks (9:10am)
EUR Germany Industrial Production (Dec) (6pm)
EUR ECB’s Guindos Speaks (7:45pm)
GBP BoE’s Pill Speaks (11:15pm)
SATURDAY (8th February)
USD Jobs Report (Jan) (12:30am)
CAD Jobs Report (Jan) (12:30am)
USD Fed’s Bowman Speaks (1:25am)
USD Uni. of Michigan Sentiment (Feb P) (2am)
USD Fed’s Kugler Speaks (4am)
*Note, all times/dates provided are AEDT
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