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• Calmer markets. US equities flat overnight, while oil & base metals edged a bit higher. US bond yields rose, with the AUD hovering just under ~$0.68
• No credit crunch. Fed’s Senior Loan Officer Survey didn’t signal an imminent credit crunch. Rather, conditions are tightening inline with higher rates.
• AUD events. Consumer sentiment, Q1 retail sales volumes, China trade data, & the Federal Budget released today. US CPI is out tomorrow night.

A relatively quiet and uneventful start to the new week. Following the strong rise on Friday, US equities were flat overnight. By contrast, energy prices added to their gains with WTI crude oil up another ~2% to ~US$73/brl. However, despite the lift over recent sessions this only puts oil prices back where they were around a week ago. Industrial metals like copper and aluminium also rose ~1% overnight. Bonds continue to exhibit the highest relative volatility. US yields rebounded, rising by ~7-9bps across the curve, with the 2-year yield back up at ~4% as survey data eased some fears that a credit crunch was forming in the US. While this puts the US 2-year yield in line with its 6-week average, this masks the fact that over this time it has traded in a very wide ~73bp range. In FX, the USD Index has clawed back a little ground with EUR drifting down towards ~1.10 and the interest rate sensitive USD/JPY holding above ~135. The AUD is tracking just under its 100-day moving average (~$0.6790) with the calmer markets and lift in energy/metals prices offsetting the increase in US yields.

The US Fed’s Senior Loan Officer Survey was released. This survey provides a guide to how tight/loose lending standards are becoming and the demand for credit. Given the flow of credit is the lifeblood of an economy these trends are important to watch. And importantly, rather than a signal a substantial deterioration because of US regional bank issues, the survey was consistent with lending standards tightening a bit further and loan demand weakening inline with the jump up in interest rates. As our chart shows, credit survey trends still point to a material slowdown in US economic activity over the next few quarters, however, recent regional bank stresses don’t look to have made the unfolding backdrop even worse (at least not yet).

For the USD and wider markets tomorrow night’s US CPI report is the next major focal point. This is the data for April. In our view, when combined with signs that a broader credit crunch has (so far) been avoided, data showing that US core inflation remains ‘sticky’ around ~5.5-5.6%pa could see US interest rate expectations continue to bounce back, and this could give the USD some renewed support. Markets continue to assume that the US Fed rate hiking cycle is now over and are factoring in over 2 rate cuts over H2 2023. Barring a shock, we don’t believe this is likely to happen.

Global event radar: US CPI (Weds), Bank of England Meeting (Thurs), US Retail Sales (16th May), China Activity Data (16th May), Japan GDP (17th May), Japan CPI (19th May), Fed Chair Powell Speaks (20th May), Eurozone PMIs (23rd May), RBNZ Meeting (24th May), US PCE Deflator (26th May), China PMIs (31st May).

AUD corner

The AUD is trading just under its 100-day moving average (~$0.6790) with calmer equity markets and lift in energy/metals prices overnight offsetting the rise in US bond yields (see above). The AUD has also continued to gain back some lost ground against the EUR, GBP, JPY, and CNH over the past 24hrs, however AUD/NZD has eased.

In today’s Asian session, Australian consumer confidence (10:30am AEST), Q1 retail sales volumes (11:30am AEST) and China trade data (no set time) are released. In line with the weakening in business confidence (released yesterday) we expect consumer sentiment to have fallen given last week’s ‘surprise’ RBA rate hike. Similarly, based on the softener trend in monthly nominal sales and higher prices, retail sales volumes are at risk of coming in weaker than projected. Volumes are a better gauge of underlying demand. We think this mix could take some steam out of the AUD as it would show that RBA rate hikes are starting to have a negative impact on households. Further ahead, tomorrow night’s US CPI report is the next major USD focal point. As discussed, we think that US core inflation holding up at a high 5.5-5.6%pa could see markets partially unwind expectations looking for over two rate cuts by the US Fed over H2 2023. If realised, we believe this could give the USD renewed support, exerting some downward pressure on the AUD.

Tonight, the Australian Federal Budget is handed down (7:30pm AEST). AUD reaction to the Budget is typically small, and we expect this to be the case once again. As our chart shows, because of higher commodity prices and income tax revenue due to low unemployment, Australia’s budget position has improved dramatically. A small surplus could be delivered this financial year. In terms of the outlook, as has been pre-announced, a “cost of living package” will be a centerpiece. It will reportedly be targeted at lower income households, with relief strategically aimed at reducing energy prices and measured inflation.

AUD event radar: US CPI (Weds), Bank of England Meeting (Thurs), US Retail Sales (16th May), China Activity Data (16th May), AU Wages (17th May), AU Jobs Report (18th May), Japan CPI (19th May), Fed Chair Powell Speaks (20th May), Eurozone PMIs (23rd May), RBNZ Meeting (24th May), US PCE Deflator (26th May), China PMIs (31st May).

AUD levels to watch (support / resistance): 0.6595, 0.6685 / 0.6789, 0.6858

SGD corner

USD/SGD is hovering down around ~$1.3250, with EUR/SGD slipping back below ~1.46. As discussed above, markets were relatively quiet overnight, with a further pick up in oil and base metal prices offset by a lift in US bond yields as survey data showed that the recent regional US banking issues haven’t exacerbated the tightening in credit conditions that usually unfolds as interest rates rise.

For markets, the US CPI inflation report (released Wednesday night Singapore time) is the next major data release. Given the tightness in the US labour market and elevated wage growth we think core inflation is likely to have held up at an elevated ~5.5-5.6%pa in April. This ‘sticky’ strong US inflation pulse, coupled with signs a credit crunch has (so far) been avoided, could support an upward repricing in US interest rate expectations, in our view. Markets continue to factor in over two rate cuts by the US Fed over H2 2023. We don’t expect this to happen. We think a paring back of these US rate cut bets could see the USD (and USD/SGD) bounce back over the period ahead.

SGD event radar: US CPI (Weds), Bank of England Meeting (Thurs), US Retail Sales (16th May), China Activity Data (16th May), Japan GDP (17th May), Japan CPI (19th May), Fed Chair Powell Speaks (20th May), Singapore CPI (23rd May), Eurozone PMIs (23rd May), US PCE Deflator (26th May), China PMIs (31st May).

SGD levels to watch (support / resistance): 1.3200, 1.3245 / 1.3338, 1.3377

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