Market Briefing: USD revival
Strong US retail sales. Positive data pushes US bond yields higher. The Fed has more work to do, and markets are pricing in higher for longer.
USD higher. After underreacting to the US CPI the USD played catch up overnight. Higher US rates are an underlying near-term support for the USD.
AUD lower. AUD has fallen back towards 0.69 as rate differentials move in favour of the US. AU labour market data is released today.
The sell-off in US bonds has continued, with yields rising once again as stronger than expected US retail sales reinforced views that the US Fed will need to do even more and keep rates at high levels for longer to slow down the economy so that the labour market weakens, and inflation can return to its 2%pa target. US 10-year yields rose another 6bps to be at 3.80%, the top of its 2023 range and close to 50bps above the January low point. Markets are now predicting the Fed Funds Rate (currently 4.75%) could peak at ~5.25% by August, with rate cut expectations pushed out into H1 2024.
In FX the USD has strengthened. We wrote yesterday how we thought the USD had underreacted to the strong underlying US inflation pulse and shift up in US interest rates. Moves overnight have partially closed that gap, however we continue to think that the USD can continue to strengthen near-term on the back of high US bond yields. The interest sensitive USD/JPY has risen above 134 for the first time since early-January, EUR has slipped back below 1.07, and the AUD is down near 0.69. GBP weakened and underperformed on the crosses with UK yields bucking the global trend and falling overnight as lower than forecast UK inflation saw Bank of England rate hike bets pared back.
Data wise, US retail sales rebounded more than predicted. After two straight falls at the end of 2022, total sales rose 3% in January, the largest monthly gain since March 2021. The bounced was broad-based with all 13 categories rising. Consumer spending accounts for ~3/4’s of US GDP, so the January data indicates the economy started 2023 in a stronger spot. This looks to be a reason US equities have held up in the face of the jump up in bond yields. The S&P500 was up overnight (+0.3%), with the tech-focused NASDAQ outperforming (+0.9%). But we doubt this can continue. A range of indicators with long track records of picking major US turning points have deteriorated and point to US growth slowing sharply over late-Q1/Q2. Risk markets appear increasingly complacent, in our view, to a ‘negative growth shock’ that could occur as effects of the rapid-fire policy tightening delivered over the past year gain traction. This supports our thinking that volatility could reignite over coming months as optimistic markets begin to crash up against a harsher economic reality. This is a backdrop that tends to favour the USD, and creates headwinds for growth-linked currencies like the AUD and NZD.
Global event radar: Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb), China PMIs (1st Mar), BoJ meeting (10th Mar), US employment report (11th Mar), ECB meeting (17th Mar), US FOMC meeting (23rd Mar).
AUD has fallen to ~0.69. Higher US bond yields on the back of the strong US retail sales data (see above) and yesterday’s US inflation reading has seen interest rate differentials move in favour of the USD. We think this AUD headwind can remain in place for a while. On one side we see scope for US rate expectations to adjust further as the US’ ‘sticky’ inflation problem and resilient labour market forces the US Fed to keep at it by raising rates over coming months and continuing to push back on market thoughts about future rate cuts.
On the other side, we believe the RBA tightening cycle now looks well priced. Markets are discounting an RBA cash rate peak of ~4.15% by September. The Australian household sector is more heavily indebted than the US, and the higher share of variable mortgages means RBA rate changes should have more of a direct impact on the economy. In our view, the large cash flow hit to mortgage holder’s points to a material slowdown in household spending and economic activity over coming months. When speaking yesterday RBA Governor Lowe stressed that “inflation was way too high and it needs to come down”, and hence rates still need to rise further near-term. But we think as the cumulative effects of the rapid rate rises show up across areas like consumer spending and the labour market the RBA’s focus could become more two-sided, with more attention given to the growth risks.
January employment data is released today (11:30am). The labour market is a lagging indicator. Given the time it takes to go from job ad to person starting, the labour stats reflect the state of play in the economy ~3-6 months ago. Demand indicators point to another solid print, with the unemployment rate forecast to hold at 3.5% (a multi-decade low). Positive labour data may give the AUD some intra-day support, but we don’t expect it to sustainably offset the stronger USD. That said, we believe it should underpin a further rebound in the AUD against GBP and NZD where we think Australia’s fundamentals are still relatively stronger.
AUD event radar: AU jobs data (today), RBA Gov. Lowe speaks (tomorrow), AU wages (22nd Feb), RBNZ meeting (22nd Feb), AU retail sales (28th Feb), AU GDP (1st Mar), China PMIs (1st Mar), RBA meeting (7th Mar), BoJ meeting (10th Mar), US employment report (11th Mar), ECB meeting (17th Mar), AU jobs data (16th Mar), US FOMC meeting (23rd Mar).
AUD levels to watch (support / resistance): 0.6806, 0.6884 / 0.7050, 0.7172
After underreacting to the US inflation print and uplift in US yields, the USD played catch up overnight with stronger US retail sales data (see above) reinforcing the view that the US Fed still has more work to do to slow the economy and get inflation on a path back down to its 2%pa target. This has seen US bond yields rise even further, supporting the USD and pushing USD/SGD above its 50-day moving average (1.3338) for the first time since early-November.
We think near-term pullbacks in the USD (and USD/SGD) should be limited, with the higher US interest rate structure an underlying source of support. Added to that, we believe that there are growing risks market volatility picks up over coming months as the effects of the large increase in interest rates and tighter monetary conditions show up more meaningfully in the US/global activity data. Periods of increased market volatility are typically positive for the USD, and tend to exert pressure on pro-cyclical currencies like Asian FX.
SGD event radar: Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb), Singapore CPI (23rd Feb), China PMIs (1st Mar), RBA meeting (7th Mar), BoJ meeting (10th Mar), US employment report (11th Mar), ECB meeting (17th Mar), US FOMC meeting (23rd Mar).
SGD levels to watch (support / resistance): 11.3050, 1.3110 / 1.3445, 1.3590
Currency Strategist - APAC
THURSDAY (16th February)
AUD Employment Report (Jan) (11:30am)
FRIDAY (17th February)
USD Housing Starts/Building Permits (Jan) (12:30am)
USD Jobless Claims (12:30am)
USD Philly Fed Business Outlook (Feb) (12:30am)
EUR ECB’s Panetta Speaks (12am)
EUR ECB’s Lane Speaks (2am)
GBP BoE’s Pill Speaks (4am)
USD Fed’s Bullard Speaks (5:30am)
AUD RBA Governor Lowe Speaks (9:30am)
USD Fed’s Mester Speaks (10:15am)
GBP Retail Sales (Jan) (6pm)
EUR ECB’s Villeroy Speaks (10:30pm)
SATURDAY (18th February)
USD Fed’s Barkin Speaks (12:30am)
*Note, all times/dates provided are AEDT