Market Briefing: RBA losing patience?

• US data. Firmer US activity & inflation data supported bond yields. USD a bit firmer against most currencies. AUD bucks the trend because of AU CPI.

• AU pulse. July inflation higher than predicted. Odds of another RBA hike by year-end lift. Late-Sep meeting 'live'. But has the AUD already factored it in?

Global Trends

• A bit of a reversal in fortunes overnight across some markets overnight with US equities a touch softer (NASDAQ -0.1%), bond yields rising a little (US rates rose ~2-4bps across the curve), oil nudging up (brent crude +0.5% to US$87.45/brl), and the USD firmer against most currencies. EUR (now ~$1.1654) and GBP (now ~$1.3597) slipped back, USD/JPY ticked up (now ~159.31), and the NZD lost ground (now ~$0.5946). By contrast, the AUD was a relative outperformer (now ~$0.7177) after yesterday’s higher than predicted Australian CPI inflation data raised the odds of another RBA rate hike by year-end.

• Focus overnight, and the catalyst for some of the moves, was the US economic data. On the activity side, durable goods orders (a proxy for business investment) grew 1.1% in July while the second estimate of Q2 US GDP showed stronger momentum in domestic growth (final sales to private domestic purchasers was revised up to 4.2%saar, its strongest pace in more than 3 years). On the inflation front, the PCE deflator (the Fed’s preferred inflation gauge) defied expectations looking for a slight moderation. The annual run-rate of the headline PCE deflator held up at 3.7%pa and the core PCE remained at 3.3%pa.

• Markets viewed the combination of ongoing economic resilience and a lack of disinflation as factors supporting the idea the US Fed may interest raise rates later this year. A hike at the mid-September US Fed meeting is now viewed as a ~38% chance, with a rate rise fully discounted by year-end and a cumulative ~41bps of tightening priced in by next June. We think markets might have jumped the gun a little. As mentioned yesterday, the US PCE has diverged from other inflation indicators somewhat due to different weights for products in the basket like computer software, portfolio management fees, and legal services prices. Based on the looming methodology changes the US core PCE could be revised lower from next month with some estimates suggesting the annual growth rate might be reduced by ~0.3-0.4%pts. If realised, this could meaningfully change the markets thinking about the prospect of future US Fed tightening, especially given the sluggishness across the jobs market. US Fed Chair Warsh speaks later this week at the annual Jackson Hole Symposium (Fri night AEST). Given his reluctance to provide forward guidance he may use the forum to discuss ‘big picture’ themes instead of the near-term policy outlook. But for myopic markets the lack of explicit pushback might reinforce current pricing looking for Fed tightening later this year, which we think may support the USD in the near-term.

Global event radar: Fed Chair Warsh (Fri night), China PMIs (31st Aug), EZ CPI (1st Sep), RBNZ (2nd Sep), BoC (2nd Sep), US Jobs (4th Sep)

Trans-Tasman Zone

• While the uptick in US yields and a firmer USD on the back of positive US economic data exerted some downward pressure on the NZD (now ~$0.5946), the AUD bucked the trend (now ~$0.7177). Relative strength on the cross-rates was a factor at play with the AUD strengthening by ~0.3-0.7% against the EUR, JPY, GBP, NZD, CAD, and CNH over the past 24hrs. At ~0.6158 AUD/EUR is less than 1% from its multi-year peak while AUD/JPY (now ~114.33) is within striking distance of multi-decade highs.

• A macro catalyst was the July Australian CPI released yesterday. The report showed that the fight against inflation isn’t over. Headline inflation was propped up by a jump in fuel costs, seasonal clothing price increases, and other forces like housing (related to rents and construction). The annual pace of headline inflation slowed to 3.5%pa, a bit higher than predicted. Similarly, the underlying inflation pulse remains sticky with ‘trimmed mean’ holding at ~3.6%pa. Services prices (which are linked to the labour market and rents) remain elevated. For the RBA, the July result is uncomfortable reading as it could make it tricky to achieve its Q3 forecast for core inflation of around +0.8%qoq. Given the RBA’s ‘hawkish’ rhetoric about upside inflation risks and its willingness to respond if they ‘materialise’, the latest data raises the odds of more policy tightening this year. Markets have shifted and are now factoring in a ~35% chance of a RBA rate increase at the late-September meeting, with another hike almost fully baked in by year-end and ~31bps of tightening discounted by next February.

• Will the RBA act again? Given the RBA’s tightening bias, we think the September meeting is ‘live’ and a hike should be up for debate, as it was at the last meeting. But when combined with the unfolding slowdown in growth and cracks appearing in the jobs market, at this stage we think the more likely outcome is for the RBA to remain patient and hold fire until at least after the next quarterly CPI is released (Q3 CPI is due in late-October). The AUD has perked on the back of the positive CPI surprise, but as indicated before, underlying dynamics suggest upside potential in the AUD from current levels might be constrained. More RBA tightening is now baked into the Australian rates curve (and as the chart shows the AUD has outpaced the change in relative spreads), but markets have yet to contemplate the greater domestic economic pain even higher rates may inflict down the track. This, combined with lingering issues in the global economy and fact other central banks having further to run in their tightening cycles could hold back AUD/USD, in our view, particularly as it is also approaching ‘overbought’ levels on technical momentum indicators.

AUD & NZD event radar: Fed Chair Warsh (Fri night), China PMIs (31st Aug), EZ CPI (1st Sep), AU GDP (2nd Sep), RBNZ (2nd Sep), BoC (2nd Sep), US Jobs (4th Sep)

AUD levels to watch (support / resistance): 0.7080, 0.7130 / 0.7190, 0.7230

NZD levels to watch (support / resistance): 0.5830, 0.5890 / 0.5970, 0.6020

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

THURSDAY (27th August)

JPY BoJ’s Himino Speaks (no set time)

AUD CAPEX (Q2) (11:30am)

AUD Household Spending (July) (11:30am)

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