Market Briefing: Too hot to handle
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Fed gyrations. US Fed cut rates but Chair Powell pushed back on views it will go again in December. Higher US yields helped the USD intra-day.
AU CPI. Sizeable upside surprise in Q3 AU inflation. RBA expected to stay on hold. We think this should be AUD supportive over the medium-term.
Macro events. BoJ meets today. ECB holds court tonight. Also on the radar is a meeting between President's Trump and Xi.
Global Trends
Ahead of today’s meeting between President’s Trump and Xi (from ~1pm AEDT) central banks were in focus overnight. Outside of bond yields there were relatively small net changes in the major asset markets as push-pull forces rolled through. While the tech-focused NASDAQ extended its positive run (+0.6%) the broader S&P500 ended the session unchanged. In FX, the USD index recovered lost ground this morning with the ~10-11bp rise in US bond yields in the wake of the US Fed meeting supportive. As a result, EUR has slipped back (now ~$1.16), the interest rate sensitive USD/JPY rose (now ~152.72, near the upper end of its multi-month range), and GBP remained on the backfoot (now ~$1.3195, around the bottom of the range occupied since mid-April). Elsewhere, NZD has given back the modest gains accrued over the past couple of days (now ~$0.5764), and the AUD unwound yesterdays Australian CPI inspired strength (now ~$0.6574). That said, the AUD is still tracking north of its 6-month average.
The Bank of Canada reduced interest rates by 25bps to 2.25% and noted this may be about the right level to keep inflation on target. Time will tell. In the US, the Federal Reserve was in the spotlight this morning. As expected, the US Fed lowered the policy target range by another 25bps to ~3.75-4.00% and announced its Quantitative Tightening (QT) (i.e. balance sheet reduction) will end in December. Interestingly, the rate decision had two-sided dissents. On the one hand, Kansas City Fed President Schmid wanted to keep things steady, while President Trump’s appointee (Governor Miran) again preferred a larger cut (i.e. 50bp). According to the Fed “uncertainty about the economic outlook remains elevated”, though “downside risks” to the job markets are deemed to have risen. This wasn’t a surprise, but comments by Fed Chair Powell that another rate cut in December is "far from…a foregone conclusion" did get traders attention and generated the bond market (and FX) intra-day gyrations.
We feel short-sighted markets may have jumped too quickly on Chair Powell’s words. Central banks don’t typically like to telegraph future moves, especially during uncertain times. Moreover, diverging views among the Fed should already be known. In its last set of forecasts 10 out of 19 officials projected at least another 25bp rate cut by year-end, while the other 9 didn’t. The data will be in the drivers seat. And in our opinion, as upside risks to inflation seem to be fading and downside risks to the labour market are increasing the US Fed has more work to do over future meetings. Markets somewhat agree. Despite the bout of volatility post the US Fed meeting markets are still pricing in another ~3 rate cuts by next September. We remain of the view that the outlook for lower US interest rates combined with slower economic activity because of higher import costs should see the USD steadily weaken over the medium-term.
Global event radar: : BoJ (Today), EZ GDP (Tonight), ECB (Tonight), China PMI (Fri), EZ CPI (Fri), US ISM (4th Nov), RBA (4th Nov), US ADP Employment (6th Nov), BoE (6th Nov)
Trans-Tasman Zone
Domestic and global macro crosscurrents generated a bit of AUD volatility over the past 24hrs (see above). On net, at ~$0.6574 the AUD is a fraction below where it was tracking this time yesterday, but it remains above its 1-month, 3-month, and 6-month averages. This morning’s upturn in the USD has also exerted a little downward pressure on the NZD (now ~$0.5764) with the modest grind up over the past few days unwound. That said, the AUD has continued to edge higher on a few of the major crosses with gains of ~0.2-0.4% recorded against EUR, JPY, GBP, and NZD. AUD/GBP (now ~0.4982) is around its highest level since late-February, AUD/EUR (now ~0.5667) is close to the top of its ~4-month range, and with economic/interest rate trends in Australia’s favour AUD/NZD has pushed up towards its cyclical peak (now ~1.1406). Ahead of today’s BoJ meeting (no set time) AUD/JPY has nudged up (now ~100.40). But as outlined the past few days we believe AUD/JPY is stretched compared to various drivers such as yield spreads and are projecting it to fall back over the longer-term.
Macro wise, Q3 Australian CPI inflation was released yesterday and it was a jolt to the system. Inflation momentum has clearly turned up. Headline inflation rose 1.3% to be 3.2% higher compared to a year ago, while the trimmed mean (the RBA’s preferred gauge which gives a better guide to inflation persistence) increased by 1% or 3%pa. Importantly, this was well north of the RBA’s forecasts and more than the buffer Governor Bullock articulated would be viewed as a “material miss”. The inflation pulse in Australia remains firm, and from our perspective this should see the RBA hold steady at its 4 November and 9 December meetings. Without a sustained upturn in unemployment we believe there is a good chance the RBA doesn’t cut interest rates again this cycle. This is something markets have shifted to with another 25bp reduction no longer baked into interest rate expectations.
Markets seldom move in straight lines and as witnessed overnight more bouts of headline driven AUD volatility should be anticipated over the period ahead. But on balance, as per our long-held view, we continue to forecast the AUD to nudge higher into year-end (i.e. towards ~$0.67-0.68) on the back of improvement in US/China trade relations, diverging policy trends between the RBA and US Fed, more favourable yield spreads, upbeat risk sentiment, and firmer growth in China as its stimulus push gains traction.
AUD & NZD event radar: BoJ (Today), EZ GDP (Tonight), ECB (Tonight), China PMI (Fri), EZ CPI (Fri), US ISM (4th Nov), RBA (4th Nov), NZ Jobs (5th Nov), US ADP Employment (6th Nov)
AUD levels to watch (support / resistance): 0.6490, 0.6550 / 0.6620, 0.6660
NZD levels to watch (support / resistance): 0.5680, 0.5730 / 0.5810, 0.5840
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events) THURSDAY (30th October) JPY BoJ Decision (no set time) NZD Business Confidence (Oct) (11am) JPY BoJ Gov. Ueda Speaks (5:30pm) EUR France GDP (Q3) (5:30pm) EUR Spain CPI (Oct P) (7pm) EUR Germany GDP (Q3) (8pm) EUR GDP (Q3) (9pm) USD GDP (Q3) (11:30pm)** FRIDAY (31st October) EUR Germany CPI (Oct P) (12am) EUR ECB Decision (12:15am) EUR ECB Pres. Lagarde Speaks (12:45am) USD Fed’s Logan Speaks (4:15am) JPY Tokyo CPI Inflation (Oct) (10:30am) JPY Industrial Production (Sep P) (10:50am) NZD Consumer Confidence (Oct) (11am) AUD PPI Inflation (Q3) (11:30am) CNY PMIs (Oct) (12:30pm) NZD RBNZ’s Gai Speaks (1:30pm) EUR France CPI (Oct P) (6:45pm) EUR CPI Inflation (Oct P) (9pm) CAD GDP – Monthly (Aug) (11:30pm) USD PCE Deflator (Sep) (11:30pm)** USD Employment Cost Index (Q3) (11:30pm)** SATURDAY (1st November) USD Fed’s Logan Speaks (12:30am) USD Chicago PMI (Oct) (12:45am) USD Fed’s Hammack & Bostic Speak (3am)
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