Market Briefing: USD pressure points

CalendarApril 19, 2024
  • Consolidation. Limited moves in markets. US bond yields rose, while the S&P500 slipped back further. The USD is firm with the AUD above ~$0.64.

  • AU jobs. Employment dipped modestly in March, but this followed a surge in February. Unemployment remains low despite the jump up in interest rates.

  • USD pressure. The stronger USD isn’t going unnoticed outside of the US. Japanese & Korean finance ministers highlighted “serious concerns”.

Given the light news flow there were only modest moves across markets overnight. European equities held in positive territory (EuroStoxx50 +0.5%) while early strength in the US S&P500 faded with the index recording its 5th straight daily fall (-0.2%). That said, despite all the recent negative sentiment the S&P500 is less than 5% from its late-March record highs and is still in positive for the year. Bond yields rebounded with the previous day’s dip largely reversed. The benchmark US 10yr rate rose ~5bps to be back at ~4.63% while the policy sensitive 2yr rate is just under 5%. Some positive second tier US data compounded more hawkish rhetoric from US Fed officials. The Philly Fed survey was stronger with the index jumping to a 2-year high on the back of new orders, shipments, and prices paid. Weekly initial jobless claims were steady at low levels indicating the US labour market remains on solid footing. US Fed policymakers were mostly on the same page with ‘higher for longer’ interest rate comments the main theme. Atlanta Fed President Bostic reiterated his now well-known view that he doesn’t think it will be appropriate to lower borrowing costs until late-2024. NY Fed President Williams noted that “policy is in a good place” to get things where they need to be, hence he doesn’t “feel urgency to cut interest rates”. Though when asked about the possibility of the Fed re-starting its hiking cycle, Williams stated that while it isn’t his base case if the data shows higher rates are needed “then we would obviously want to do that”. Markets are now factoring in only ~1.5 rate cuts by the US Fed this year. In FX the USD remains firm underpinned by the higher US interest rate structure. EUR unwound a bit of its recent recovery to be near ~$1.0640. GBP is hovering around ~$1.2440 (the bottom end of its 2024 range), USD/JPY is at the top of its multi-decade range (now ~154.55), while the AUD gave back some ground overnight (now ~$0.6420) despite solid Australian labour market data given last month’s stellar report and uptick in base metal prices (copper rose ~2%, its 4th increase in the past 5 days). The stronger USD isn’t going unnoticed outside of the US given the weakness in other currencies can have inflation impacts via higher import prices. A joint statement by US Treasury Secretary Yellen and the Japanese and Korean finance ministers highlighted “serious concerns” over sharp Yen and Won depreciation. The PBoC also proclaimed it will prevent one-sided Yuan moves. The comments suggest FX intervention risks by various countries to prop up their respective currencies is elevated. While it typically doesn’t work on its own the threat of currency intervention can help limit further USD strength, in our view, especially as the ‘hawkish’ US Fed rates repricing looks to have largely played out and a lot of ‘good news’ looks baked into the USD.

Global event radar: Japan CPI (Today), Eurozone PMIs (23rd Apr), US GDP (25th Apr), BoJ Meeting (26th Apr), US PCE Deflator (26th Apr), Eurozone CPI/GDP (30th Apr), US Employment Cost Index (30th Apr), China PMIs (30th Apr)

AUD corner

The AUD has consolidated over the past 24hrs with the small uptick in the USD exerting a bit of pressure overnight (now ~$0.6420) and overpowering the lift in base metal prices and yesterday’s Australian labour market impacts. On the crosses the AUD tread water with limited net moves coming through. At ~0.6030 AUD/EUR is near its 200-day moving average. AUD/NZD looks to have stabilised just under ~1.09, while AUD/JPY remains at lofty levels (now ~99.30) despite a modest 1.5% pull-back over the past week. Locally, the latest addition of the labour force lottery was released yesterday. After the strong February report analysts were looking for statistical payback. In the end the unwind wasn’t as bad as some had feared. The volatile monthly employment component fell 6,600 (due to a drop in part-time jobs), however the unemployment rate only inched up to 3.8%. All up, while conditions have loosened over the past year, the labour market still looks tight. Outside of the January reading, unemployment has been sub-4% for 2-years despite the RBA putting through 425bps worth of rate hikes. And as our chart shows, recent outcomes have been a little better than anticipated with the RBA looking like it may need to revise down its near-term unemployment forecasts. The resilience in the Australian labour market, slow moving wage dynamics given the use of multi-year enterprise bargaining agreements, support for aggregate demand from the larger population, and incoming stage 3 tax cuts underpin our thinking that the RBA is likely to lag its peers in terms of when it starts and how far it goes during the next easing cycle. Over time this shift in interest rates should be AUD supportive, in our view, particularly on crosses like AUD/EUR, AUD/GBP, and AUD/NZD. More broadly, as discussed recently and above, while we feel the USD should remain supported in the short-term, we believe a lot of the upswing (and in turn the AUD’s pullback) has now washed through with US interest rate pricing unlikely to shift up much further from here. Added to that bearish AUD position (as measured by CFTC futures contracts) is high, Australia’s supportive capital flow position remains in place, the AUD is trading at a discount (the average across our suite of fair-value models is sitting at ~$0.6550), and the AUD has struggled to sustainably trade much below where it now is. Since 2015 the AUD has only been below ~$0.64 ~4% of the time.

AUD event radar: Japan CPI (Today), Eurozone PMIs (23rd Apr), AU CPI (24th Apr), US GDP (25th Apr), BoJ Meeting (26th Apr), US PCE Deflator (26th Apr), Eurozone CPI/GDP (30th Apr), US Employment Cost Index (30th Apr), China PMIs (30th Apr)

AUD levels to watch (support / resistance): 0.6350, 0.6390 / 0.6470, 0.6510

Market Moves

Peter Dragicevich

Currency Strategist - APAC

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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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