Market Briefing: Twists & turns in US rates
US yields. Swings in US yields over the past few days on the back of Treasury news has generated some FX vol. AUD near top of its multi-week range.
AU jobs. Cracks in the AU labour market are widening. Unemployment at 2021 levels. RBA may not need to hike rates again. AUD headwinds building.
Global Trends
A few more ructions across markets over the past couple of sessions. But rather than being geopolitically driven the gyrations related to developments in the US bond market, and this spilled over into other asset classes like FX. Yesterday the US Treasury announced it will “double the size of its long-end buy backs from $2bn to $4bn per operation” to improve liquidity and support rates at the far end of the yield curve which have been rising due to inflation and debt sustainability worries.
Markets initially reacted to the surprise move in a way that they perceive this to be a form of “yield curve control” being reimplemented with US yields falling and the USD weakening. However, as the dust settled and markets had more time to digest the surprising news, things reversed overnight with US yields moving back up (+3-6bps across the curve) and the USD recouped some lost ground despite Treasury Secretary Bessent proclaiming the Treasury has a “big toolkit” to fight against the uptrend in long end bond yields. The US 30yr rate (now ~5.25%) is up in a region last traded in 2007 with the 10yr yield (now ~4.70%) also at elevated levels. From our perspective, while the steps unveiled signal the US Treasury’s discomfort with movements in long end rates (which are economically important as they are linked to US mortgages, corporate borrowing, and government interest repayments), true yield curve control requires the US Fed to step in as it can conduct operations that target a particular rate in “unlimited” amounts. Something that may be necessary because of the US’ persistent fiscal deficits and large stock of government debt.
The reversal in yields, coupled with lingering tensions in the Middle East, dampened risk sentiment overnight. President Trump vowed to apply maximum economic pressure on Iran. Oil prices rose again with Brent Crude now just below US$94/brl, while equities slipped back (S&P500 -0.9%). In FX, the EUR consolidated (now ~$1.1679), USD/JPY tracked the rebound in US yields (now ~159.07), NZD range traded near the top of its multi-week range (now ~$0.5943), and the AUD drifted a touch lower after data showed cracks in the Australian labour market are widening (now ~$0.7113).
Data wise, the global business PMIs are due today (Eurozone 6pm AEST, US 11:45pm AEST). In our opinion, more signs relative growth momentum is shifting away from the US and towards the rest of the world could exert a bit of pressure on the USD. But, at the same time, unresolved issues in the Middle East, higher oil prices (given the US’ swing to becoming a ‘net energy exporter’), and shaky risk sentiment stemming from rising bond yields are offsetting forces.
Global event radar: JP CPI (Today), Global PMIs (Today), US PCE Deflator (26th Aug), Jackson Hole Symposium (27th-29th Aug)
Trans-Tasman Zone
Push/pull market forces have generated a few intermittent bursts of volatility in the AUD and NZD the past few days with the initial dip in US yields/weaker USD on the back of the US Treasury announcement partially unwinding overnight (see above). At ~$0.5943 the NZD is around the upper end of the range has occupied since early-June. The AUD has drifted a little lower from where it was 24hrs ago (now ~$0.7113) due to softer Australian employment data which has also seen the AUD underperform on the crosses. Outside of AUD/JPY which has risen by ~0.5% (now ~113.15), the AUD shed ~0.2-0.3% against the EUR, GBP, NZD, CAD, and CNH.
As mentioned, the latest Australian jobs report underwhelmed consensus predictions. After a large jump in June (which was revised up to +80,200), employment fell in July (-15,800) due to part-time jobs (-32,200 vs full-time +16,300). This was a risk we warned about earlier in the week, particularly as the survey reference week coincided with school holidays. Notably, the unemployment rate (which shouldn't be as impacted by month-to-month noise) edged up further to 4.5%, its highest since late-2021.
More slack in the labour market (and a higher unemployment rate) is the price that typically needs to be paid to break the back of inflation. With higher interest rates/tax changes working through the housing market and wider economy even higher unemployment may be on the cards, in our view. The RBA may continue to talk tough about the chances of another rate hike for a while given inflation worries, but over time, we think the turn in the jobs market could win out and remove the need to tighten policy further.
Markets are factoring in a 50/50 chance of another RBA rate rise by year-end and ~18bps of tightening by next February. On balance, we believe the RBA is closer to the end than the beginning of its tightening phase, while other central banks have room to run, hence the AUD’s upside potential might be constrained. As mentioned before, over the period ahead, we feel that more macro headwinds than tailwinds exist for the AUD such as the stepdown in Australian growth, issues for the global/Asian economy stemming from disrupted energy supply, and valuation concerns across AI/tech stocks. We think the backdrop can see the AUD underperform currencies such as EUR, JPY, CNH, and NZD.
AUD & NZD event radar: JP CPI (Today), Global PMIs (Today), AU CPI (26th Aug)
AUD levels to watch (support / resistance): 0.7020, 0.7070 / 0.7150, 0.7190
NZD levels to watch (support / resistance): 0.5840, 0.5900 / 0.5970, 0.6010
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (21st August)
JPY PMIs (Aug P) (10:30am)
GBP Retail Sales (July) (4pm)
EUR France PMIs (Aug P) (5:15pm)
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EUR PMIs (Aug P) (6pm)
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