Market Briefing: Upbeat tone. But for how long?

• Positive vibes. Improved sentiment about the US/Iran conflict has weighed on oil prices. Bond yields lower, equities higher. AUD & NZD rose overnight.

• Data trends. Australian monthly CPI out today. US PCE deflator due tonight. Signs of moderating inflation may generate AUD & USD volatility.

Global Trends

• Markets were in a slightly better mood overnight with bonds and equities underpinned by a dip in oil. The tech-centric NASDAQ (+0.7%) outperformed the broader S&P500 (+0.3%), while US bond yields shed ~6-7bps across the curve. The US 10yr rate (now ~4.63%) has slipped towards the bottom of its 1-month range, however if you take a step back long-end yields remain elevated with the US 10yr up in a region seldom traded the past few years. Developments in the Middle East have been in the driver’s seat with improved perceptions about the drawn-out conflict weighing on energy prices. Brent crude (now ~US$86.95/brl) is ~8% below Monday’s intra-session peak after back-to-back daily falls. The US’ shift in strategy to monetary rather than military pressure via ‘Operation Economic Outcast’, which is aimed at severing Iran’s financial lifelines, has boosted hopes negotiations could restart and a sustainable deal may be reached. That said, there is still a lot of water to go under the bridge and as observed repeatedly the past few months the positive vibes can quickly fade.

• In FX, the USD index eased slightly with EUR (now ~$1.1674) and GBP (now ~$1.3647) nudging up and USD/JPY consolidating (now ~159.21). Growth linked currencies such as the NZD (now ~$0.5976) and AUD (now ~$0.7163) appreciated. Given the US’ shift to becoming a ‘net energy exporter’ a few years ago the USD has become more positively correlated to swings in oil prices. In addition to the pullback in oil prices the USD has also been on the backfoot because of a run of underwhelming US economic data and downward repricing in US Fed interest rate expectations. Markets are now factoring in a ~38% chance of a US Fed rate rise in September (from ~75% discounted in late-July) with ~35bps of tightening baked in by next March. Overnight there was more second tier US data released that undershot predictions. US consumer confidence fell in August to its lowest since the start of the year, new home sales declined, and the Richmond Fed index weakened.

• Tonight, the macro focus in the US will be on the PCE deflator (the Fed’s preferred inflation gauge), durable goods orders (a proxy for business investment), and second estimate of Q2 GDP (all 10:30pm AEST). Later in the week US Fed Chair Warsh speaks at the annual Jackson Hole Symposium (Fri night AEST). As our chart shows, the PCE has decoupled from other inflation indicators. This somewhat reflects different weights for products in the basket. The methodology for a few of these like computer software, portfolio management fees, and legal services prices will be revised (most likely lower) next month. For July, we see a risk the core PCE undershoots consensus forecasts looking for it to hold at 3.3%pa. If realised, we believe this may see markets further trim their near-term US Fed rate hike bets and this in turn might exert downward pressure on the USD.

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

Trans-Tasman Zone

• The improved market tone stemming from renewed positivity about the US/Iran situation and dip in oil prices weighed on bond yields and supported equities overnight (see above). This backdrop boosted cyclical currencies with the NZD (now ~$0.5976) at the top of its multi-month range, and the AUD (now ~$0.7163) is near the upper end of the range it has occupied since mid-May. The backdrop also helped the AUD perk up a bit on the major cross-rates with gains of ~0.1-0.3% recorded against EUR, JPY, GBP, CAD, and CNH overnight. At ~114.05 AUD/JPY is less than 1% from its multi-decade peak.

• Today in Australia the monthly CPI data is released (11:30am AEST). Higher fuel costs, a rebound in airline prices, and seasonal increases in clothing could see headline inflation rise by ~1% in the month, however base effects related to larger increases over the past year should also mean the annual rate-rate slows (mkt 3.3%pa from 3.8%pa). The trimmed mean is also projected to inch slightly lower (mkt 3.5%pa from 3.6%pa). In our view signs annual inflation is moving in the right direction, albeit slowly, could compound the widening cracks developing in the labour market. We think the RBA should continue to talk tough about the potential of another rate hike in order to maintain tighter financial conditions, but underlying macro trends suggest it may not deliver it. Markets are factoring in a ~50% chance of another RBA increase by November, with ~17bps of tightening factored in by next February.

• A paring back of RBA interest rate expectations could exert a little pressure on the AUD short-term, however a softer USD and prospect of a deceleration in the US PCE deflator (10:30pm AEST) may work the other way. There are push-pull forces at work when it comes to the AUD. In our opinion, given we feel the RBA is closer to the end than the beginning of its tightening phase while other central banks have room to run, the unfolding stepdown in Australian growth, lingering issues in the global/Asian economy, and elevated starting point the AUD’s upside potential from here might be constrained. Moreover, we think the macro forces could see the AUD underperform EUR, JPY, CNH, and NZD over the medium-term.

AUD & NZD event radar: AU CPI (Today), US PCE Deflator (Tonight), Fed Chair Warsh (Fri), 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): 0.5890, 0.5930 / 0.6010, 0.6060

Market Moves

Peter Dragicevich

Currency Strategist - APAC

peter.dragicevich@corpay.com

Upcoming Events

WEDNESDAY (26th August)

AUD CPI Inflation – Monthly (July) (11:30am)

AUD Construction Work (Q2) (11:30am)

USD PCE Deflator (July) (10:30pm)

USD Durable Goods Orders (July P) (10:30pm)

THURSDAY (27th August)

USD Fed’s Barkin Speaks (1:45am)

JPY BoJ’s Himino Speaks (no set time)

AUD CAPEX (Q2) (11:30am)

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

USD Trade Balance (July) (10:30pm)

USD Initial Jobless Claims (10:30pm)

FRIDAY (28th August)

NZD Filled Jobs (July) (8:45am)

JPY Tokyo CPI Inflation (Aug) (9:30am)

EUR France CPI Inflation (Aug P) (4:45pm)

EUR Spain CPI Inflation (Aug P) (5pm)

CAD GDP (Q2) (10:30pm)

USD Chicago PMI (Aug) (11:45pm)

SATURDAY (29th August)

USD Payrolls Benchmark Revisions (12am)

USD Fed Chair Warsh Speaks (12am)

EUR ECB’s Schnabel Speaks (1:55am)

*Note, all times/dates provided are AEST