Market Briefing: Risk reversal

• Market rebound. Pres. Trump backtracks on Strait of Hormuz levy. US CPI softer. Odds of a July Fed hike pared back. USD weaker. AUD & NZD rise.

• Data pulse. US CPI underwhelms, but Fed Chair Warsh not swayed. US producer prices out tonight. China GDP due today. BoC expected to hold.

Global Trends

• The modest market meltdown at the start of the week unwound overnight with the mood more positive. On net, US equities rose (S&P500 +0.4%) with the tech-focused NASDAQ outperforming (+0.9%), US bond yields dipped ~3-9bps across the curve, and the USD lost a bit of ground. EUR ticked up (now ~$1.1420), as did GBP (now ~$1.3387), while USD/JPY consolidated at lofty levels (now ~162.27). Cyclical currencies like the NZD (+1% to ~$0.5811) and the AUD (+0.8% to ~$0.6974) strengthened.

• The reversal reflected another shift by President Trump regarding the Strait of Hormuz as well as US macroeconomic factors. In what wasn’t a total surprise given his ‘TACO’ record (i.e. Trump Always Chickens Out), after pushback from Gulf nation allies President Trump backed away from his plan to charge a 20% levy on cargo sent via the Strait with various nations now set to (allegedly) undertake trade/investment deals with the US. Economically, the US CPI data for June underwhelmed with headline (now ~3.5%pa) and core (now ~2.6%pa) inflation slowing more than predicted. A look under the hood finds that a drop in gasoline prices was compounded by other things like a step down in tariffs and negative World Cup related effects given pre-bookings boosted some categories over previous months. In response, odds of a late-July rate hike by the US Fed declined with markets now only factoring in a ~17% chance it will happen, with an increase not fully discounted until December. This is down from ~43bps of tightening priced in by year-end earlier this week.

• That said, the Fed doesn’t appear to be that swayed by one month’s CPI data. When speaking overnight, new Fed Chair Warsh maintained a ‘hawkish’ tone by reiterating his “resolute commitment” to restoring price stability and noting he doesn’t think the July CPI outcome is “mission accomplished” as there is still “plenty of work to do”. With this in mind, we believe there could be more USD volatility over coming days given US Producer Prices (10:30pm AEST) and retail sales (Thurs night AEST) are due. US Fed expectations might continue to move around. But on balance, more signs of contained price pressures and/or softer consumer spending after a solid run might see markets continue to pare back their near-term US Fed rate hike bets, which in turn may see the USD weaken a little further, in our opinion. China Q2 GDP is also out today (12pm AEST) and the Bank of Canada is expected to keep interest rates steady (11:45pm AEST).

Global event radar: China GDP (Today), BoC (Tonight), US Retail Sales (Thurs), ECB (23rd July)

Trans-Tasman Zone

• The more upbeat risk sentiment, as illustrated by the rebound in US equities, stemming from developments in the Middle East, coupled with the downward adjustment in US interest rate expectations and a softer USD following the US CPI data, have given the NZD and AUD a boost over the past 24hrs (see above).

• At ~$0.5811 the NZD is just shy of its 1-year average, with ‘hawkish’ RBNZ rhetoric also providing a helping hand. When speaking yesterday RBNZ Chief Economist Conway noted that, given Middle East developments, there were already upside risk to the Bank’s central inflation forecast. Strengthening inflation pressures were also evident in the quarterly NZIER survey which showed a further rise in cost and pricing intentions. The RBNZ raised interest rates by 25bps to 2.5% last week, but clearly there is more work to do. Markets are pricing in ~3-4 more RBNZ increases by mid-2027. Over the medium-term, we think an improving NZ economy and rising interest rates should be NZD supportive and that the diverging macro trends could see AUD/NZD (now ~1.20) slip back over time.

• The AUD (now ~$0.6974) has also perked up to be back at levels traded a few weeks ago. Data released yesterday showed Australian consumer confidence improved in July, however it remains below average. Similarly, business conditions are also rather subdued with hiring intentions slowing and capacity utilization well off last years highs. The underlying pulse supports the view that the RBA is closer to the end than the beginning of its tightening cycle with markets only factoring in another ~15bps of hikes by year-end. Looking ahead, the next major Australian economic releases are the monthly jobs report (23rd July) and Q2 CPI (29th July). Near-term, offshore developments are likely to be in the AUD driver’s seat with China GDP (12pm AEST) and US Producer Prices (10:30pm AEST) on the horizon. Push-pull forces of more sluggish China growth and/or softer US price pressures could generate more bursts of AUD volatility. But on net, we think the shift in relative interest rate differentials against the AUD, combined with the slowdown in Australian growth and/or challenges faced by the Asian economy from prolonged disruptions to energy/supply-chains mean there are still more headwinds than tailwinds for the AUD.

AUD & NZD event radar: China GDP (Today), BoC (Tonight), US Retail Sales (Thurs), NZ CPI (21st July), AU Jobs (23rd July), ECB (23rd July)

AUD levels to watch (support / resistance): 0.6850, 0.6920 / 0.7000, 0.7030

NZD levels to watch (support / resistance): 0.5730, 0.5780 / 0.5830, 0.5870

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

WEDNESDAY (15th July)

CNY GDP (Q2) (12pm)

CNY Monthly Activity Data (June) (12pm)

EUR ECB’s Panetta Speaks (6pm)

EUR Industrial Production (May) (7pm)

GBP BoE’s Pill Speaks (8:30pm)

USD PPI Inflation (June) (10:30pm)

USD Empire Manufacturing Index (July) (10:30pm)

USD Fed’s Williams Speaks (10:45pm)

CAD BoC Decision (11:45pm)

THURSDAY (16th July)

USD Fed Chair Warsh Speaks (12am)

EUR ECB’s Nagel Speaks (2am)

USD Fed’s Cook Speaks (3am)

USD Fed’s Beige Book (4am)

GBP GDP – Monthly (May) (4pm)

USD Philly Fed Index (July) (10:30pm)

USD Initial Jobless Claims (10:30pm)

USD Retail Sales (June) (10:30pm)

FRIDAY (17th July)

USD NAHB Housing Market Index (July) (12am)

USD Fed’s Logan Speaks (2:30am)

USD Fed’s Schmid Speaks (3:25am)

USD Fed’s Jefferson Speaks (9am)

USD Import/Export Prices (June) (10:30pm)

USD Housing Starts/Building Permits (June) (10:30pm)

USD Industrial Production (June) (11:15pm)

SATURDAY (18th July)

USD Uni. of Michigan Sentiment (July P) (12am)

*Note, all times/dates provided are AEST