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• Softer USD. A surprise jump in US weekly jobless claims exerted some pressure on the USD. Positive risk sentiment helped the AUD.
• BoE signals. BoE further opened the door to a rate cut. European central banks are leading the pack in the next global easing cycle.
• Divergence. Policy divergence between the RBA & others should be AUD supportive. As should the pick up in growth in China.

A more upbeat tone across risk assets overnight with the major European and US stockmarkets rising ~0.3-0.5%, oil (WTI crude +0.7%) and copper (+1.3%) firmer, and the USD losing some ground. The backdrop helped the AUD bounce back up towards ~$0.6620, only slightly below where it was prior to this week’s RBA meeting. NZD also rose (now ~$0.6040, a 1 week high) and USD/SGD eased (now ~1.3520).

The mix of a dovish tone from the Bank of England, the largest weekly increase in US jobless claims since June (which in part looks seasonal), and stronger export and import growth out of China after the Lunar New Year impacted results last month underpinned the moves. US bond yields slipped back with the 2yr rate ~2bps lower (now 4.81%), with the UK equivalent shedding ~6bps (now 4.23%) as markets slightly added to their BoE and US Fed rate cut bets. The negative USD reaction to the US jobless claims report swamped the BoE effects with GBP ending the day higher (now ~$1.2530). Similarly EUR jumped up to be near recent highs (now ~$1.0785).

As outlined yesterday, European central banks look to be at the front of the queue when it comes to the easing cycle. Following on from the rate cuts by Sweden’s Riksbank and the Swiss National Bank the BoE further opened the door to a move sooner rather than later. Notably, a second member of the 9 person BoE committee is voting for a cut, and the BoE flagged it “will consider forthcoming data releases” and how these “inform the assessment that the risks from inflation persistence are receding”. BoE Governor Bailey added that although a June rate cut was neither “ruled out” or a “fait accompli”, “it’s likely that we will need to cut bank rates over the coming quarters… possibly more so than currently priced”. A full BoE rate cut is factored in by August, with a ~60% chance it occurs in June discounted. Markets are also assigning a ~95% probability the ECB moves in early-June, while 2 rate cuts between November and January are priced in for the US Fed.

Today Q1 UK GDP is released (4pm AEST), with the economy predicted to have returned to modest growth in early 2024. If realised we think this could dampen some of the BoE rate cut pricing, which in turn may give GBP a bit of support and/or drag on the USD. Next week there are several key US events on the radar with Fed Chair Powell speaking (Weds morning AEST), and US CPI and retail sales due (both Weds night AEST). In our opinion, after a strong start to the year US inflation pressures should decelerate, as might US retail sales. This type of mix, in our judgement, could revive longer-dated US Fed rate cut pricing and weigh on the USD.

AUD Corner

The AUD rebounded overnight with the more positive tone across risk markets, a softer USD after the weaker US jobless claims data, and diverging monetary policy expectations between the RBA and other major central banks supportive. At ~$0.6620 the AUD has largely unwound its post RBA pull-back with the AUD also outperforming on the crosses. AUD/EUR has ticked higher (+0.3%), as has AUD/GBP (+0.4%) after the ‘dovish’ signals from the Bank of England (see above). AUD/CNH (+0.5%) has also undergone a round trip over the past few days, while AUD/JPY has edged up towards ~102.90, ~2% from its cyclical peak.

As discussed over the past few days, we weren’t expecting the lack of a change in the RBA’s forward guidance to have a lasting effect on the AUD (see Market Wire: RBA: Vigilant to the risks). A lot of the RBA’s underlying message still sounded relatively ‘hawkish’ to us. While further rate hikes may not occur cuts still look some time away given the stickiness in domestic inflation, a resilient labour market, incoming stage 3 tax cuts, and prospect of more cost-of-living relief at next Tuesday’s Federal Budget.

We have long thought that the RBA would lag its peers in terms of when it starts and how far it goes in the next global easing cycle. Local and offshore developments this week reinforce our expectations. The diverging monetary policy outlooks between the RBA and others, and resultant widening in yield differentials in Australia’s favour, should be AUD supportive over the medium-term, in our opinion. As should a more positive global growth pulse and commodity demand, particularly from China. Yesterday’s trade data from China showed a healthy acceleration in export and import growth following the Lunar New Year disruptions in March. The pick up in imports is a positive sign for future domestic demand, and based on the stimulus measures that are being injected we are anticipating a further improvement in growth momentum in China over the period ahead. We believe this should be a favourable environment for industrial metals like copper and in time the AUD. As our chart shows, the AUD looks undervalued based on where the copper price now is.

Market Retreat Continues as Yields Climb
Hawkish Kashkari Comments Pour Cold Water on Markets
Market Momentum Fades After US Long Weekend
No news is good news
Dollar Cruises Toward Weekly Gain on Fading Easing Expectations
Twists & turns

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