Market Briefing: RBA charting a different course

CalendarFebruary 7, 2024
  • Tide turning? Bond yields reversed a little, while there was a jump in Chinese equities on expectations of more support measures.  

  • RBA holds. No change in rates by the RBA & it continues to keep its options open with another hike not ruled out. 

  • AUD firmer. The evolving dynamics have given the AUD some support. We think a lot of negatives are factored into the AUD around current levels.

The upturn in bond yields reversed a little overnight. Following the large jump over recent sessions US rates fell back with the 10yr yield ~7bps lower (now 4.09%). The 2-year rate tracked a similar path (now 4.41%). There was no major catalyst. Rhetoric from US Fed officials remained cautious with Kashkari noting inflation has come down quickly but “we’re not all the way there yet”, hence more time is needed to assess things before looking to ease policy. Similarly, the Fed’s Mester echoed Chair Powell’s message by flagging there is no need to rush rate cuts, although if things hold on the current track policymakers should gain confidence to begin the process “later this year”. Markets are now pricing in the first Fed rate cut by June, with odds of a March move whittled down to ~20% (from ~90% in late-December).

US equities consolidated (S&P500 +0.1%) with the gains in Europe (EuroStoxx50 +0.8%) and a solid rise in China (CSI300 +3.5%) not replicated. Anticipation is mounting policymakers in China will unveil further steps to bolster the economic recovery and/or prop up markets. Reports indicate regulators are planning to update the top leadership (including President Xi) on the state of play and the latest proposals which included yesterday’s pledge by Central Huijin Investment, the unit holding government stakes in the large financial institutions, to increase ETF purchases.

Measures to help turn around the fortunes of Chinese equities can boost confidence and this in turn can have positive spillovers across China's economy. Policy levers continue to be pulled, and we think that over coming months as various initiatives gain traction growth momentum in China should improve. As our chart shows greater capital inflows and an equity market revival is typically a CNH tailwind, and based on the positive correlation, this can also be AUD supportive over time. USD/CNH eased yesterday towards its 200-day moving average (~7.2024). More broadly the USD paused for breath with EUR tracking sideways near ~$1.0750, GBP inching up to ~$1.26, and USD/JPY slipping in line with the dip in bond yields (now ~147.90). USD/SGD drifted lower (now ~1.3442), while the AUD recovered some lost ground with the RBA’s more ‘hawkish’ than priced guidance providing a helping hand (now ~$0.6520).

US Fed speakers will be in focus over coming days with several appearances spread across the rest of the week. While push-back on near-term rate cut expectations is likely to continue, given the scale of the adjustment that has now taken place, we believe potential upside in the USD looks limited from here. The gap between the markets interest rate views and the US Fed’s central case has narrowed over recent weeks, and given data released next week appears set to show US inflation is continuing to slow and retail sales moderated after a late-2023 flurry a refocus on the medium-term outlook for US interest rates to move lower could return.  

Global event radar: US CPI revisions (Sat), UK CPI (14th Feb), US CPI (14th Feb), UK GDP (15th Feb), US Retail Sales (16th Feb), Canada CPI (21st Feb), US Fed Minutes (22nd Feb), Eurozone/UK PMIs (22nd Feb), Japan CPI (27th Feb), RBNZ Meeting (28th Feb), China PMIs (29th Feb).

AUD corner

The beleaguered AUD found some support yesterday with the lift in Chinese equities, uptick in CNH, and some push back by the RBA on near-term rate cut pricing coming through (see above). At ~$0.6520 the AUD is back around where it started the week, with the AUD also clawing back ground on most crosses. AUD/EUR has edged up ~0.5% to be just below its 200-day moving average (~0.6067). While AUD/NZD unwound yesterday’s uptick this morning following a better than anticipated Q4 NZ labour market report (now ~1.07). NZ employment growth was stronger (2.4%pa), meaning the unemployment rate (now 4%) did not rise as much as feared, while wage growth was also firmer (+1%qoq). The data should see markets pare back near-term RBNZ rate cut pricing , a short-term positive for the NZD.

In its first meeting of 2024 and first under the new ~6-week frequency, the RBA kept rates steady at 4.35%. More attention was on the RBA’s updated forecasts and policy guidance. And as per our thinking the RBA played a straight bat by continuing to stress that while “inflation is easing, it remains high”, the interest rate path will depend on how things unfold, and “a further increase in interest rates cannot be ruled out”. Although the RBA is continuing to keep the door ajar to further tightening, we don’t think it will walk through it. Its already mild tightening bias has been diluted, with a downshift to 'neutral' undertaken. That said, we also believe the RBA appears to be in no rush to start lowering rates with a gradual and modest easing cycle only expected to start later this year (see Market Wire: RBA: A more balanced approach).

In our judgement, a lot of negativities appear discounted in the AUD down around current levels (note, since 2015 the AUD has only traded below where it is currently ~7% of the time), and as discussed above we feel the USD’s resurgence might soon begin to lose steam. More broadly, we remain of the view that over the course of 2024 the AUD should gradually edge up as: (a) a sturdier Chinese economy (as policy stimulus measures gain traction) underpins commodity demand and capital flows into Emerging Market assets; (b) the USD softens as US Fed rate cuts actually start; and (c) short-dated yield differentials narrow in the AUD's favour given we see the RBA charting a different course to its peers during the rate cutting cycle because of the support to demand from the larger population, Stage 3 tax cuts, labour market conditions, and stickiness across ‘services’ inflation due to Australia’s slower moving wage dynamics.

AUD event radar: NZ Jobs (Today), RBA Gov. Bullock Speaks (Fri), US CPI revisions (Sat), UK CPI (14th Feb), US CPI (14th Feb), AU Jobs (15th Feb), UK GDP (15th Feb), US Retail Sales (16th Feb), Canada CPI (21st Feb), AU Wages (21st Feb), US Fed Minutes (22nd Feb), Eurozone/UK PMIs (22nd Feb), Japan CPI (27th Feb), RBNZ Meeting (28th Feb), AU CPI (28th Feb), China PMIs (29th Feb).

FX Moves

Peter Dragicevich

Currency Strategist - APAC

Upcoming Events

WEDNESDAY (7th February)

USD Fed’s Harker Speaks (11am)

GBP BoE’s Breeden Speaks (7:40pm)

EUR Germany Industrial Production (Dec) (6pm)

THURSDAY (8th February)

USD Trade Balance (Dec) (12:30am)

USD Fed’s Kugler Speaks (3am)

USD Fed’s Collins Speaks (3:30am)

USD Fed’s Barkin Speaks (4:30am)

USD Fed’s Bowman Speaks (6am)

CNH CPI/PPI Inflation (Jan) (12:30pm)

EUR ECB’s Wunsch Speaks (10:30pm)

FRIDAY (9th February)

USD Initial Jobless Claims (12:30am)

GBP BoE’s Mann Speaks (2am)

EUR ECB’s Lane Speaks (2:30am)

USD Fed’s Barkin Speaks (4:05am)

AUD RBA Governor Bullock Speaks (9:30am)

EUR ECB’s Nagel Speaks (9:30pm)

SATURDAY (10th February)

USD CPI Revisions

CAD Jobs Report (Jan) (12:30am)

EUR ECB’s Cipollone Speaks (1:15am)

*Note, all times/dates provided are AEDT


Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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