DXY firmed last night:
AUD firmed:
Oil and gold yawn:
Big miners popped just because:
EM is stuck:
Junk rolled:
As US yields grind inexorably to new highs:
Chasing the bubble:
Credit Agricole wraps us up:
Recent client meetings have highlighted that one of the biggest challenges for FX investors so far this year has been to correctly time the peak of the Fed tightening cycle. In particular, it seems that market participants who have previously jumped on the policy-convergence bandwagon and sold the USD have now been reassessing their outlook for the currency, especially vs the beleaguered Asian currencies. The key reason for the reassessment is the growing expectation that the peak of the Fed tightening cycle will come later in the year (eg, in September) in view of the resilient US data and sticky US inflation.
FX investors will focus on (1) the June Non-farm payrolls report on Friday; (2) the manufacturing ISM today; and (3) the services ISM, JOLTS and ADP on Thursday as they look for fundamental support for the Fed’s recent hawkish shift. The market will also focus on the June FOMC minutes as well as speeches by the Fed’s John Williams and Lorie Logan as they look for indications of growing support for a more hawkish Fed policy stance from here. In all, evidence from the data and Fedspeak this week that suggests that the Fed is not done tightening could boost the USD’s relative rate appeal across the board. Furthermore, to the extent that tightening US financial conditions further weigh on risk sentiment, this could boost demand for the safe-haven USD.
I expect the Fed to hike. It has no choice but to chase the AI bubble as it threatens to boost domestic demand before its inflation job is done. CA also tackles the AUD:
The Australian rates market is currently pricing in about a 20% chance of a 25bp rate hike by the RBA on Tuesday. We think a more accurate reflection of the closeness of the decision tomorrow is the survey of market economists, which shows they are nearly split down the middle with only a slight majority looking for the RBA to be on hold. We are in the on-hold camp. The RBA Minutes to the June meeting show the decision to raise rates by 25bp was “finely balanced”. While the
data since then has been pushing the RBA towards hiking rates again, there have been temporary factors impacting this data, making the RBA’s decision tougher. Australia’s unemployment rate dipped back to 3.6% and closer to a 50Y low. A large part of the strong rise in employment and the fall in unemployment in May was a rebound from an Easter hiatus by job seekers, however. While monthly inflation data shows a sharp decline in headline inflation from 6.8% YoY to 5.6% YoY, this drop was largely due to a fall in fuel prices and inflation. Excluding volatile items, inflation nudged only slightly lower from 6.5% YoY to 6.4% YoY. The jump in retail sales by 0.7% MoM in May, however, is an especially important data point
for the RBA to digest. Retail sales were boosted by temporary factors such as bringing forward mid-year discounts, Mother’s Day and the “Click Frenzy Mayhem” online sales. High levels of spending on dining out, however, will pique the RBA’s interest. It shows a significant cohort of the population still has savings to spend, even while other households are struggling. And the big jump in building approvals in May was due to a large rise in the volatile private non-house approvals series, which is dominated by apartments. One apartment project can lead to wild and temporary swings in the data. We think the sharp decline in headline inflation buys the RBA time to wait for more data, which is made all the more important by the temporary factors impacting the data.
The market reaction to an on-hold decision would be a knee-jerk move in the AUD lower, with the final reaction being decided by the RBA’s rhetoric. The rates market is about 80% priced for another 50bp worth of rate hikes this year, so the RBA would have to continue to sound hawkish and say, “more tightening may be needed” in order to sustain this pricing and the AUD. A rate hike would see the knee-jerk jump in the AUD, but with the potential for the market reading the RBA’s move as simply being the bringing forward of one of the market’s two expected rate hikes. Again, the RBA’s rhetoric will be important for the ultimate impact on the AUD.
I expect a hawkish hold from the RBA. Domestic demand data is falling away fast, and progress has been made on inflation. There is loads of embedded tightening to come.
The RBA appears cognisant of both.
