Market Briefing: USD recovery continues
Mixed markets. US equities are a little stronger, with US bond yields slightly lower. However, the USD remains firm.
US data focus. Initial jobless claims remain low, a sign the labour market is still tight and that the US Fed has more work to do.
AUD pressure. AUD slipped below 0.68 overnight before recovering modestly. We see further near-term downside on the back of a stronger USD.
While market moves have generally been modest, underlying themes have remained the same, especially in FX markets. US equities whipped around overnight, but have ended the day in positive territory (S&P500 +0.6%), with bond yields giving back a bit more of their recent gains. US bond yields have eased 1-4bps across the curve. The US 10-year yield (now 3.88%) is off its highs, but remains over 50bps above its early-February low. Markets continue to price in a few more rate hikes by the US Fed over coming months, with the first cut now not discounted until Q1 2024. Elsewhere, oil has ticked up, though at US$82/brl Brent crude is still below its 6-month average, and industrial metals have declined slightly. In FX, the USD remains firm. EUR has drifted down below 1.06 for the first time since the start of the year, USD/JPY is just below 135, and after briefly dipping sub 0.68 the AUD is tracking a touch above its 200-day moving average (0.6802).
The US dataflow was limited, however it did provide another snapshot of the challenges central banks are facing. While the second estimate of Q4 US GDP was revised marginally lower, the core inflation measure was revised higher. At the same time, weekly initial jobless claims, a timely reading of the US labour market, remain historically low. Another sign the US labour market remains very tight and that the Fed has more work to do in its battle against inflation. The US is now estimated to have grown at a 2.7% annualised pace in Q4. Although growth momentum has slowed, it still hasn't decelerated enough to put a meaningful dent in the labour market, which is what needs to happen for services inflation to decline.
US personal spending, PCE inflation (the Fed’s preferred inflation measure), and new home sales data is released tonight, and there are a few Fed members also set to speak. The incoming US activity data is projected to improve, and the inflation gauge is predicted to show underlying pressures remain sticky. We also think the Fed officials are likely to reiterate that the job isn’t done and that interest rates need to increase further and stay at high levels for some time. In our view, if realised, this mix should reinforce the market’s interest rate expectations, and support the USD .
Global event radar: China PMIs (1st Mar), Eurozone CPI Inflation (2nd Mar), RBA Meeting (7th Mar), BoJ Meeting (10th Mar), US Employment (11th Mar), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), US FOMC Meeting (23rd Mar).
AUD has remained under some pressure, trading below 0.68 overnight for the first time since early-January. Although the AUD has recovered back above its 200-day moving average (0.6802), tracking the late-session bounce in US equities, we don’t think the underlying trend has changed.
We remain of the view that a further fall towards the 100-day moving average (0.6722) may be on the cards and that near-term rebounds in the AUD should be limited. This reflects our positive USD outlook (see above) and expectation for relative interest rate differentials to remain in the US’ favour. On the US side of the ledger, the incoming data is forecast to show improvement, and we think that the Fed members due to speak are likely to continue to stress that policy settings need to remain restrictive for an extended period to bring inflation back down to target.
Locally, next week January retail sales (Tuesday) and Q4 GDP (Wednesday) are released. Retail spending softened into year-end, and another weak print could provide further evidence that the sharp jump in mortgage rates and other cost-of-living pressures are starting to bite. Similarly, while the forward-looking CAPEX intentions released yesterday indicated that business investment should remain positive, lessening 2023 recession risks, the bits that flow into Q4 GDP weren’t particularly strong. There are more inputs to come but at this stage risks are tilted to a sluggish GDP result. In our view, market reaction may be asymmetric, with a run of softer activity data likely to generate a larger paring back of still lofty RBA rate hike expectations. Markets are penciling in the RBA cash rate to peak at ~4.25% by October. By contrast, we see rates topping out at ~3.85-4.10% in the next few months.
AUD event radar: AU Retail Sales (28th Feb), AU GDP (1st Mar), China PMIs (1st Mar), RBA Meeting (7th Mar), BoJ Meeting (10th Mar), US Employment (11th Mar), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), AU Jobs Data (16th Mar), US FOMC Meeting (23rd Mar).
AUD levels to watch (support / resistance): ): 0.6722, 0.6802 / 0.6916, 0.7050
On the back of the firm USD, USD/SGD has moved above 1.34 for the first time since early-January. USD/SGD is now ~3% above its cyclical low. We believe this trend can continue near-term. The upcoming US data releases are forecast to show improvement, and the rhetoric from Fed officials should continue to stress the need to do more to tackle inflation. The stronger USD and elevated US bond yields, in our view, should continue to support USD/SGD, with any retracements likely to be limited.
Data released yesterday showed Singapore CPI inflation accelerated in the year to January, although not as much as what was anticipated. Headline inflation ticked up to 6.6%pa, while core inflation quickened to 5.5%pa. Core inflation, which is closely watched by the MAS, is now running at its fastest pace since late-2008. Even though the inflation data came in slightly below market expectations, the bottom line is that it is still too high. The inflation pulse points to further tightening of the MAS’ exchange rate policy at the mid-April meeting, in our opinion. That said, all central banks are in the same inflation boat, and it remains a US Fed/USD story in FX markets at present
SGD event radar: China PMIs (1st Mar), Eurozone CPI Inflation (2nd Mar), RBA Meeting (7th Mar), BoJ Meeting (10th Mar), US Employment (11th Mar), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), US FOMC Meeting (23rd Mar).
SGD levels to watch (support / resistance): 1.3210, 1.3321 / 1.3450, 1.3590
Currency Strategist - APAC
FRIDAY (24th February)
JPY CPI Inflation (Jan) (10:30am)
SATURDAY (25th February)
USD PCE Inflation (Jan) (12:30am)
USD Personal Income & Spending (Jan) (12:30am)
USD Fed’s Jefferson Speaks (voter in 2023) (2:15am)
GBP BoE’s Tenreyro Speaks (3:30am)
USD Fed’s Collins Speaks (non-voter in 2023) (5:30am)
USD Fed’s Waller Speaks (voter in 2023) (5:30am)
*Note, all times/dates provided are AEDT