Market Briefing: USD doldrums
21st August 2024
Mixed markets. Equities slip back, while bond yields & the USD lose ground. EUR above ~$1.11 for first time this year. AUD at ~1-month high.
Global events. JPY also stronger. BoJ research papers keep door open to more hikes. Canadian inflation slows & Sweden's Riksbank cuts rates again.
US data. Annual US payrolls revisions due tonight. Downward revisions look likely. PMIs (Thurs) & Fed Chair Powell's speech (Fri) the main events.
Mixed, albeit modest moves, across asset markets overnight. After a stellar run equities paused for breath with the US S&P500 slipping back (-0.2%), its first fall in 9 sessions. US and European bond yields also declined, with the US 2yr rate ~8bps lower (now ~3.98%) and the 10yr down ~6bps (now ~3.81%). Softer Canadian inflation was a driving force (see below). In FX, the USD lost more altitude, dragged down by lower US yields. EUR has moved above ~$1.11 for the first time since late-December, GBP is back over ~$1.30 (the top of its 1-year range), and USD/JPY has dropped towards ~145. The decline in global bond yields compounded expectations the Bank of Japan is on a different path and could raise rates further after research papers released yesterday highlighted the persistence of inflation across the Japanese economy. Elsewhere, the downshift in the USD has pushed USD/SGD (now ~1.3050) towards its February 2023 lows, while the NZD (now ~$0.6150) and AUD (now ~$0.6745) have continued to grind higher.
In terms of the data, in Europe Sweden’s Riksbank lowered interest rates for the second time, with the 25bp reduction to 3.5% widely expected. That said, ‘dovish’ forward guidance whereby the Riksbank stated rates “can be cut somewhat faster than was assessed in June” because of lower inflation and growth risks caught the eye. Sweden is a small open economy that is influenced by external conditions so its policy calls are often a sign of things to come from other major regional central banks like the ECB and Bank of England. In Canada, CPI inflation surprised to the downside with the average across the core measures easing to ~2.55%pa. In response markets are now penciling in 25bp rate cuts by the BoC at each of the remaining 3 meetings of 2024, with ~150bps of easing discounted by mid next year.
Tonight, the US Bureau of Labor Statistics releases its annual benchmark revisions for the jobs data (12am AEST). As our chart shows, US non-farm payrolls have been an outlier compared to other measures of employment growth such as the household survey. The revisions are expected to lower reported payrolls growth over the past year. While a downward adjustment should have little bearing on near-term risks to the US labour market, sizeable changes might add a bit more downward pressure on the USD. That said, as mentioned over the past few days, we believe there is a chance the USD recoups lost ground later this week if the PMIs (Thurs) show positive momentum in the economy, and/or Fed Chair Powell isn’t as ‘dovish’ as what is baked into US interest rate expectations at his upcoming Jackson Hole appearance (Fri night AEST). While Chair Powell should nod to a potential move in September we also think he will stress a data-driven and cautious approach to the easing cycle. Markets are pricing in an aggressive ~95bps of Fed rate cuts over the remaining 3 meetings of 2024. This is unlikely to materialise, in our view, without an exogenous shock.
Global event radar: Global PMIs (Thurs), Japan CPI (Fri), Fed Chair Powell Speaks (Sat), Jackson Hole Symposium (Thurs-Sat), EZ CPI (30th Aug), US PCE Deflator (30th Aug), China PMIs (31st Aug)
AUD corner
The AUD has remained on its upward path with the softer USD on the back of lower US bond yields (see above) pushing it up to ~$0.6745, its highest level since mid-July. That said, the AUD has lost momentum on most of the crosses. The stronger JPY stemming from the drop in global bond yields and BoJ research papers suggesting the door is still open to more rate hikes because of Japanese inflation pressures has seen AUD/JPY dip below ~98. AUD/EUR (now ~0.6060) and AUD/NZD (now ~1.0965) have eased slightly, while AUD/CNH (now ~4.80) has consolidated just above its 100-day moving average.
Locally, the minutes of the August RBA meeting were released yesterday. As expected most of the messaging was already known with the RBA continuing to push back against the idea of near-term rate cuts. We continue to think that based on the still high level of activity across the economy, resilient labour market, sticky domestic/core inflation, and income support from the stage 3 tax cuts and other relief measures, the start of a gradual and limited RBA rate cutting cycle is a story for H1 2025. In our opinion, the diverging policy outlooks between the ‘higher for longer’ RBA and other central banks that are already in the process of lowering rates should be AUD supportive over the medium-term, particularly on crosses like AUD/EUR, AUD/GBP, and AUD/NZD.
However, over the near-term we think the AUD’s upswing may find resistance, and risks partly unwinding later this week. As flagged yesterday, due to the speed of its appreciation, the AUD is nearing ‘overbought’ levels various technical indicators. Moreover, the gap between the AUD and our estimate of ‘fair value’ has largely closed. And we believe there is a risk the upcoming events might help the USD rebound. Signs US growth remains positive in the PMI data (released Thurs) and/or comments from Chair Powell (Fri night AEST) which lean against the aggressive US Fed easing assumptions could generate an upward adjustment in US interest rate expectations. If realised, this in turn could boost the USD and take some of the heat out of the AUD.
AUD event radar: Global PMIs (Thurs), Japan CPI (Fri), Fed Chair Powell Speaks (Sat), Jackson Hole Symposium (Thurs-Sat), AU CPI (28th Aug), EZ CPI (30th Aug), US PCE Deflator (30th Aug), China PMIs (31st Aug)
AUD levels to watch (support / resistance): 0.6640, 0.6680 / 0.6760, 0.6800
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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