Market Briefing: US/EU trade optimism
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack
US strength. US/EU trade optimism supported sentiment. US equities rose, as did the USD. AUD & NZD lost a bit of ground. JPY weakened.
AU CPI. Monthly inflation for April released today. There are a few push-pull factors at this time of year. Will the disinflation trend stall?
RBNZ meeting. Another RBNZ rate cut expected today. More easing priced in down the track. Could the NZD strengthen 'after the fact'?
Global Trends
A burst of trade and economic optimism washed through markets overnight with US traders back on deck after their long-weekend break. The mood music around US/EU trade relations was positive. Following on from the weekend announcement that the US had extended the EU tariff deadline to 9 July markets were buoyed by President Trump’s social media post stating the “EU has called to quickly establish meeting dates”. The comments boosted hopes a deal can be struck over the next few weeks. Also helping was the jump up in US consumer confidence with the ‘pause’ in outsized tariffs and lower petrol prices supporting sentiment. The US Conference Board gauge unwound the bulk of its March/April falls, although it remains below its 5yr average.
In terms of the numbers the US S&P500 played a bit of catch up and rose 2% with the tech-focused NASDAQ outperforming (+2.5%). The easing of trade risks exerted some downward pressure on yields, though this played second fiddle to the sharp drop in Japanese rates which dragged on global bonds. In a shot across the bow of markets yesterday Japan’s Finance Ministry sent a questionnaire to participants asking about their views about the current market situation and bond issuance trends. Japan’s 40yr bond yield fell 18bps in response, while the US 10yr yield shed a more modest 7bps overnight (now 4.44%). In FX, the USD index edged higher with EUR (now ~$1.1332) and GBP (now ~$1.3509) losing ground, while USD/JPY appreciated ~1% (now ~144.26). The firmer USD weighed on the AUD (now ~$0.6446) and NZD (now ~$0.5950) with today’s RBNZ decision (12pm AEST, where another interest rate cut is expected) also on the radar.
The evolving risks around the US economic outlook have started to influence investment decisions, particularly by offshore asset allocators. As our chart shows, the stronger US economy and market leading US megacap tech sector have seen global investors allocate a lot of funds to the US over recent years. However, the ground appears to be shifting. As outlined previously, we think the Trump Administrations trade policies could see the US’ economic outperformance fade as higher import costs dampen consumer activity and business investment. At the same time equity/bond market valuations in other regions look more attractive. This mix might see capital inflows into the US dry up and/or reverse course. This is a factor behind why we believe the USD should trend lower over the medium-term.
Global event radar: RBNZ Meeting (Today), US PCE Deflator (Fri), China PMIs (Sat), EZ CPI (3rd June), US ISM (3rd June), AU GDP (4th June), US Jobs (6th June)
Trans-Tasman Zone
The uptick in the USD on the back of the more positive expectations about a US/EU trade deal and outperformance of US financial markets has exerted a bit of downward pressure on the AUD and NZD over the past 24hrs. At ~$0.6446 the AUD is hovering near its 200-day moving average, and is around the middle of its 1-year range. The NZD (now ~$0.5950) is also near the middle of its 1-year range. The AUD has been mixed on the crosses with modest gains against the JPY (now ~93) and NZD (now ~1.0833) offset by declines versus the EUR (-0.2%), GBP (-0.2%), CAD (-0.1%) and CNH (-0.5%).
Today the Australia CPI indicator for April is released (11:30am AEST). As it is the first month of the new quarter, the incomplete monthly CPI gauge will be more heavily weighted towards ‘goods’ prices rather than stickier ‘services’ costs. We think there are risks CPI holds up and bucks consensus predictions looking for the annual run-rate to ease from 2.4% to 2.3%. Many durable goods categories are seasonally strong in April given they are compared against January discounting. Travel prices may also spring a surprise given the Easter Holiday and ANZAC Day long weekend, as could health insurance premiums which are measured in April. In our opinion, signs the disinflation trend is stalling could reinforce expectations that the RBA is in the midst of a modest and gradual easing cycle. The more favourable domestic economic and RBA policy trends should, in our opinion, be AUD supportive against currencies such as the EUR, CAD and CNH over time. In terms of AUD/USD, as discussed above, we think the shifting capital flow dynamics in the US look set to weigh on the USD (and in turn support the AUD) over the medium-term.
Across the Tasman, the RBNZ meets today (12pm AEST). Another 25bp rate cut is widely anticipated with all surveyed economists forecasting further easing and interest rate markets assigning a ~101% chance of a move. Outcomes compared to expectations matter in markets. Some additional easing is also priced in over coming months. As such, we believe it may be tricky for the RBNZ to be more 'dovish' than what is already discounted. This may mean the NZD strengthens a little 'after the fact' in the short-term.
AUD & NZD event radar: AU Monthly CPI (Today), RBNZ Meeting (Today), US PCE Deflator (Fri), China PMIs (Sat), EZ CPI (3rd June), US ISM (3rd June), AU GDP (4th June), US Jobs (6th June)
AUD levels to watch (support / resistance): 0.6350, 0.6400 / 0.6520, 0.6550
NZD levels to watch (support / resistance): 0.5850, 0.5900 / 0.6040, 0.6090
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
WEDNESDAY (28th May) USD Fed’s Williams Speaks (10am) AUD CPI Inflation – Monthly (Apr) (11:30am) AUD Construction Work (Q1) (11:30am) NZD RBNZ Decision (12pm) NZD RBNZ Press Conference (1pm) USD Fed’s Kashkari Speaks (6pm)
THURSDAY (29th May) USD FOMC Meeting Minutes (4am) NZD RBNZ Gov. Speaks (7:10am) NZD Business Confidence (May) (11am) AUD CAPEX (Q1) (11:30am) USD Initial Jobless Claims (10:30pm) USD Fed’s Barkin Speaks (10:30pm)
FRIDAY (30th May) USD Fed’s Goolsbee Speaks (12:40am) USD Fed’s Kugler Speaks (4am) USD Fed’s Daly Speaks (6am) NZD Consumer Confidence (May) (8am) JPY Tokyo CPI Inflation (May) (9:30am) JPY Industrial Production (Apr P) (9:50am) USD Fed’s Logan Speaks (10:25am) AUD Building Approvals (Apr) (11:30am) AUD Retail Sales (Apr) (11:30am) EUR Spain CPI (May) (5pm) EUR ECB’s Panetta Speaks (6:30pm) EUR Germany CPI (May) (10pm) CAD GDP (Q1) (10:30pm) USD PCE Deflator (Apr) (10:30pm) USD Chicago PMI (May) (11:45pm)
SATURDAY (31st May) CNY PMIs (May) (11:30am)
*Note, all times/dates provided are AEST
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