Market Briefing: Pressure building

• USD firm. The upswing in US Fed rate hike expectations is supporting the USD. Positive US data this week can keep this in place.

• AUD softer. Rate differentials remain in the USD's favour. AU wage data released this week. We doubt it can change the AUD's recent trend.

• AUD/NZD in focus. RBNZ meets this week. Because of the national emergency we think there is a chance the RBNZ hikes by less than expected.

Risk markets remained on the defensive at the end of last week. US and European equities eased back (-0.2-0.6% across the major indices), brent crude dipped ~2% to be near $83/brl, and bond yields gave up some ground. The US 10yr yield ended Friday ~11bps below its intra-day high, but at 3.82% it is still near the top of its 2023 range. In FX, the USD tracked the bond market, giving back some of its gains late in the day, but the index remains near its 1-month high. EUR continues to track sub-1.07, USD/JPY is above 134, and the AUD is below its 50-day moving average (~0.6890).

The outlook for US interest rates remains a key underlying market driver. Speakers from the US Fed continue to press home the message that there is still more work to do to get on top of inflation. Richard Fed President Barkin (non-voter in 2023) noted that he still favours hiking by 25bp clips, but has an open mind about how many more may need to be delivered. Governor Bowman (2023 voter) stressed that the Fed will “have to continue” to raise rates “until we see a lot more progress” on bringing down inflation. Markets are now factoring in a Fed Funds Rate (currently 4.75%) peak of ~5.3% by August, with the first rate cut not fully discounted until early-2024.

It looks set to be a quiet start to the week given the President’s Day holiday in the US. However, there are several US data points and the minutes of the last FOMC meeting scattered throughout the rest of the week. Expectations are centred on the US data (PMIs, existing home sales, personal income and spending, PCE inflation) improving, while we think the FOMC minutes could provide colour around the debate to lift rates by 25bps or 50bps at the last meeting, and/or continue to push back on the idea inflation will fall away quickly and that an easing cycle may unfold soon. In our view, a positive run of US data and comments in the FOMC minutes and by Fed speakers reaffirming the higher-for-longer stance and resolve to keep at it until the battle against inflation has been won should reinforce the upswing in US rate expectations and continue to support the USD.

Global event radar: Eurozone PMIs (tomorrow), FOMC Meeting Minutes (23rd Feb), China PMIs (1st Mar), Eurozone CPI Inflation (2nd Mar), RBA Meeting (7th Mar), BoJ Meeting (10th Mar), US Employment (11th Mar), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), US FOMC Meeting (23rd Mar).

AUD corner

AUD continues to trade below its 50-day moving average (0.6890), something it hasn’t done since early-November. We expect the AUD to remain on the backfoot over the period ahead, with rebounds limited, given our thinking risk markets have underreacted to the jump up in US bond yields and may be complacent to a potential “growth shock” as the impacts of higher interest rates impact economic activity. Added to that, we continue to believe yield differentials should remain in the US’ favour. Expectations for the US Fed may adjust further, in our view, while at the same time we think the RBA tightening cycle looks more than well priced. The market is assuming the RBA cash rate peaks at ~4.17% in October.

In his Parliamentary Testimony RBA Governor Lowe reiterated the central view that inflation is too high and that the current focus is on raising rates further to get inflation on a track down to target. Another lift in the wage price index (released Wednesday) on the back of the tight labour market should support this near-term view and give the AUD some intra-day support. That said, our take is that the RBA also appears cognisant of the medium-term risks of overdoing it, and we think the case for a pause may build over coming months as consumption and labour market soften. We are looking for the cash rate to peak at ~3.85% in April/May.

On the crosses, AUD/NZD is in focus this week. AUD/NZD has ticked back above 1.10, ~5% above its December low. In addition to a potentially solid Australian wages print, the RBNZ policy announcement is also on Wednesday. Consensus is looking for a 50bp hike, taking the RBNZ cash rate up to 4.75%. Due to the devastation wrecked by ex-tropical cyclone Gabrielle, NZ is in the middle of a national emergency. As such, we think there is a chance the RBNZ delivers a smaller hike or no hike at all this week. If realised this would weigh on the NZD. The RBNZ has acted very aggressively over the past year, and there are broadening signs the tightening is working. The near-term hit to growth from the disaster is another factor that could support a more cautious approach from the RBNZ from here. Our big picture view is for a range of relative fundamentals, like growth momentum and commodity prices, to remain in the AUD’s favour and for AUD/NZD to move up to ~1.15 over coming quarters.

AUD event radar: AU Wages (Wednesday), RBNZ Meeting (Wednesday), AU Retail Sales (28th Feb), AU GDP (1st Mar), China PMIs (1st Mar), RBA Meeting (7th Mar), BoJ Meeting (10th Mar), US Employment (11th Mar), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), AU Jobs Data (16th Mar), US FOMC Meeting (23rd Mar).

AUD levels to watch (support / resistance): 0.6711, 0.6805 / 0.6980, 0.7050

SGD corner

The uptrend in USD/SGD continues, with the pair hovering around its highest level since early-January. USD/SGD is now over 2.5% above its 2 February low, with the lift in US interest rate expectations and stronger USD the main drivers.

We continue to think that near-term pullbacks in the USD and USD/SGD should be limited, with the 50-day moving average (1.3328) providing support. In our view, a positive run of US data and comments in the FOMC minutes and by Fed speakers reiterating the US central bank still has further work to do to be sure inflation is on a sustainable path back down to target can keep US interest rate expectations elevated and be USD supportive. Singapore CPI data (released Thursday) is predicted to show annual inflation accelerated in January. While the data may generate some intra-day SGD volatility, we don’t expect it to have a lasting impact given the USD's larger influence on recent USD/SGD trends.

SGD event radar: Eurozone PMIs (tomorrow), FOMC Meeting Minutes (23rd Feb), Singapore CPI (23rd Feb), China PMIs (1st Mar), Eurozone CPI Inflation (2nd Mar), RBA Meeting (7th Mar), BoJ Meeting (10th Mar), US Employment (11th Mar), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), US FOMC Meeting (23rd Mar).

SGD levels to watch (support / resistance): 1.3210, 1.3331 / 1.3445, 1.3590

FX Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

MONDAY (20th February)

No major economic events/data scheduled.

TUESDAY (21st February)

GBP BoE’s Woods Speaks (6am)

AUD RBA Meeting Minutes (Feb) (11:30am)

EUR PMIs (Feb) (8pm)

GBP PMIs (Feb) (8:30pm)

WEDNESDAY (22nd February)

CAD Retail Sales (Dec) (12:30am)

CAD CPI Inflation (Jan) (12:30am)

USD PMIs (Feb) (1:45am)

AUD Wage Price Index (Q4) (11:30am)

AUD Construction Work Done (Q4) (11:30am)

NZD RBNZ Policy Meeting (12pm)

NZD RBNZ Governor Orr Speaks (from 1pm)

EUR German IFO (Feb) (8pm)

THURSDAY (23rd February)

USD FOMC Meeting Minutes (Feb) (6am)

AUD CAPEX (Q4) (11:30am)

AUD Average Weekly Earnings (Nov) (11:30am)

SGD CPI Inflation (Jan) (4pm)

GBP BoE’s Mann Speaks (8:30pm)

EUR CPI Inflation (Jan, final) (9pm)

GBP BoE’s Cunliffe Speaks (9:45pm)

FRIDAY (24th February)

USD Fed’s Bostic Speaks (non-voter in 2023) (2:50am)

USD Fed’s Daly Speaks (non-voter in 2023) (6am)

JPY CPI Inflation (Jan) (10:30am)

SATURDAY (25th February)

USD PCE Inflation (Jan) (12:30am)

USD Personal Income & Spending (Jan) (12:30am)

USD Fed’s Jefferson Speaks (voter in 2023) (2:15am)

GBP BoE’s Tenreyro Speaks (3:30am)

USD Fed’s Collins Speaks (non-voter in 2023) (5:30am)

USD Fed’s Waller Speaks (voter in 2023) (5:30am)

*Note, all times/dates provided are AEDT