Market Briefing: US exceptionalism maxed out?

CalendarApril 24, 2024
  • Good vibes. The rebound in US equities continued as did the AUD's revival. US bond yields slipped back while oil prices rose.

  • Growth trends. European PMIs improved while US gauges underwhelmed. Signs the US' outperformance may have topped out weighed on the USD.

  • AU CPI. The AUD’s rebound faces a short-term challenge today with Q1 CPI due. There are two-way risks around the data which could generate AUD vol.

The more positive tone across markets continued overnight. European and US equities rose with the S&P500’s 2.1% rally over the past two days unwinding about 1/3 of the pull-back that came through earlier this month. Bond yields were mixed. European rates ticked up 2-4bps, while US yields slipped back with the policy expectations driven 2yr rate falling ~4bps (now 4.93%). Across commodities, oil prices edged higher (WTI crude +1.8% to US$83.30/brl), and although copper dipped (-1%) it remains ~26% above its October lows and around levels last traded in 2022 as signs global activity is turning the corner in a more positive direction.

In FX, the USD index lost ground. GBP (now ~$1.2450) and EUR (now ~$1.07) appreciated after the latest batch of European and US business PMIs showed growth differentials may be topping out and starting to shift against the USD. Led by a larger than anticipated improvement in the labour-intensive services sectors the UK and Eurozone composite PMIs moved further into ‘expansionary’ territory and are at ~11-month highs. Relatively more ‘hawkish’ rhetoric from the BoE’s Pill who stated there is still a “reasonable way to go” before he is sure inflation has been tamed also gave GBP a boost as near-term BoE rate cut assumptions were trimmed. By contrast, the US PMIs underwhelmed with manufacturing and services gauges undershooting as businesses scaled back hiring intentions and voiced concerns about the outlook.

Elsewhere, the backdrop has helped the NZD (now ~$0.5930) and AUD (now $0.6485) extend their recoveries, while USD/JPY is hovering near multi-decade highs (now ~154.80) despite Japanese officials ramping up their displeasure regarding the weak JPY. Yesterday Japanese Finance Minister Suzuki proclaimed the “environment is in place for intervention, if needed”, the strongest warning yet. The JPY trade weighted index (which is what matters for the economy and inflation) is below where it was when the Japanese last stepped into FX markets in 2022 to prop up the JPY. Risks of Japanese FX intervention have risen, and if it were to occur we think that based on the stretched ‘short’ JPY positioning and the elevated level of USD/JPY compared to fundamentals (our fair value model suggests USD/JPY should be closer to 140) there may be a sharp short-term impact on the JPY and broader FX markets as USD/JPY is the second most traded currency pair.

As our chart shows, consensus 2024 growth forecasts for the US have been revised higher over the past few months and non-US growth predictions have barely moved. Widening growth differentials, coupled with the upward shift in US interest rates have boosted the USD over the past few months. However, markets are driven by outcomes compared to expectations. And in our view, a lot of ‘good news’ looks factored into the lofty USD. We believe risks are skewed towards US economic activity failing to exceed elevated forecasts and non-US growth vaulting over low hurdles.

Global event radar: US GDP (Thurs), BoJ Meeting (Fri), US PCE Deflator (Fri), Eurozone CPI/GDP (30th Apr), US Employment Cost Index (30th Apr), China PMIs (30th Apr), US FOMC (2nd May), US Jobs (3rd May)

AUD corner

The more positive risk vibes and softer USD as the US’ growth outperformance over Europe looks to be topping out (see above) has helped the AUD continue to pick itself up off the floor. At ~$0.6485 the AUD is almost 2% above last Friday’s risk aversion low. The AUD has also continued its recovery on most of the major crosses, with AUD/GBP (-0.2%) the exception following the ‘hawkish’ BoE comments and firmer UK PMI data. AUD/EUR is nearing its 100-day moving average (~0.6070). AUD/JPY has ticked above 100. In our view, this is too high, and we continue to see more medium-term downside than upside potential in AUD/JPY from its current lofty heights. AUD/CNH is approaching its 1-year average (~4.73), and AUD/NZD has edged back up towards the top of its multi-month range.

The AUD’s rebound faces a short-term domestic data challenge today with Q1 CPI due (11:30am AEST). Based on the moving parts there are two-way risks around the data. A downside CPI surprise could see RBA rate cut expectations lift and the AUD fall back, while a higher-than-anticipated CPI print is likely to be an AUD positive as the next RBA easing cycle gets pushed further into the future. While annual inflation should slow as positive base-effects from last year continue to flow through and demand and supply rebalances, we think core inflation might hold up more than predicted (mkt 3.8%pa from 4.2%pa in Q4) due to stickiness across services prices because of wages/unit labour costs and other things like rents, with regulated price hikes in areas like education kicking in, and with disinflation across ‘goods’ prices fading.

More broadly, we remain of the opinion that there are asymmetric risks for the AUD down near current levels, and as seen over the past week dips towards ~$0.64 or below don't tend to typically last too long. Bearish market positioning (as measured by CFTC futures) is already quite large; the AUD is tracking at a ~2 cent discount to the average across our suite of 'fair value' models; since 2015 (when Australia’s capital flow dynamics turned more supportive) the AUD has only traded sub ~$0.6450 ~6% of the time; the upswing in the USD may have played out given US interest rates and relative growth expectations could struggle to move much higher from here; and with industrial activity in China beginning to improve.

AUD event radar: AU CPI (Today), US GDP (Thurs), BoJ Meeting (Fri), US PCE (Fri), Eurozone CPI/GDP (30th Apr), US Employment Cost Index (30th Apr), China PMIs (30th Apr), NZ Jobs (1st May), US FOMC (2nd May), US Jobs (3rd May)

AUD levels to watch (support / resistance): 0.6400, 0.6430 / 0.6510, 0.6540

Market Moves

Peter Dragicevich

Currency Strategist - APAC

Upcoming Events

WEDNESDAY (24th April)

AUD CPI Inflation (Q1) (11:30am)

EUR ECB’s Nagel Speaks (5pm)

EUR ECB’s Cipollone Speaks (5:35pm)

EUR Germany IFO (Apr) (6pm)

CAD Retail Sales (Feb) (10:30pm)

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

THURSDAY (25th April)

EUR ECB’s Schnabel Speaks (12am)

CAD BoC Meeting Deliberations (3:30am)

EUR ECB’s Schnabel Speaks (5pm)

EUR ECB’s Schnabel Speaks (6:20pm)

USD GDP (Q1 A) (10:30pm)

USD Initial Jobless Claims (10:30pm)

FRIDAY (26th April)

USD Pending Home Sales (Mar) (12am)

EUR ECB’s Nagel Speaks (1:15am)

EUR ECB’s Panetta Speaks (3:30am)

JPY BoJ Policy Decision (no set time)

NZD Consumer Confidence (Apr) (8am)

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

AUD PPI Inflation (Q1) (11:30am)

EUR ECB’s Centeno Speaks (7pm)

USD Personal Income/Spending (Mar) (10:30pm)

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

*Note, all times/dates provided are AEDT


Peter Dragicevich

Peter Dragicevich

Currency Strategist - APAC

Peter analyses and forecasts global macroeconomic trends to draw out possible implications for interest rates, commodity pricing, and the FX markets for Australia and across Asia.

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