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BoJ & US labour market in focus

Shaky risk sentiment. Bond yields fall as some partial data points to a looming turn in the labour market. Equities also under pressure.
US labour report. Market reaction to the outcome should be binary. A strong (weak) result would boost (weigh) on the USD.
BoJ announcement. Will outgoing BoJ Governor Kuroda spring one last surprise? If he does, the JPY would strengthen. Our base case is for no change today.

Although the economic news flow has been light, there were some notable market moves overnight, generated by lower tier US labour market data. In a break from the recent trend, US bond yields fell, down by 9-20bps across the curve as expectations for how high the US Fed could raise rates this cycle were pared back. The US 2yr led the declines, and at 4.87% it is roughly where it was trading on Monday. Across other markets, equities declined, with the S&P500 down ~1.9%, with bank stocks under pressure. Energy prices also slipped, and at $81.50/brl Brent crude oil is near a 1-month low. In FX, the USD index drifted a touch lower (down ~0.3%), with EUR nudging back up towards 1.06 and USD/JPY easing towards 136. After poking its head back above $0.66, AUD dipped back towards its recent lows late in the session as risk sentiment soured.

One of the bond market triggers was some tentative signs the heat is finally coming out of the red-hot US labour market. US initial jobless claims edged up last week, but as our chart shows, at ~211,000 claims remain historically low. However, other data points to a looming trend change. Challenger job layoffs, a leading indicator of unemployment claims, also jumped up, with the February reading at its highest level since 2009. As severance pay for those that have been laid off runs out jobless claims should lift.

The large bond moves reinforces our thinking that the US Fed’s (and RBA’s) data-dependency in judging what the next steps will be will mean FX and interest rate volatility is higher than normal around upcoming releases. Tonight’s US labour market report (released 12:30am AEDT) and next week’s CPI (14th March) and retail sales (15th March) data are the key inputs ahead of the 23 March Fed announcement. Large positive or negative misses could see Fed rate hike expectations swing around meaningfully, this would flow through to FX and other markets. In terms of tonight’s US labour data, we think risks are tilted to another strong result. If realised, this could see US bond yields recover, which in turn should support the USD and weigh on risk sentiment.

During today’s Asian trade the Bank of Japan policy announcement is also due (no set time). This is the last meeting for outgoing Governor Kuroda. The consensus sees no change today, but there is a risk Governor Kuroda pulls out one last rabbit from his hat before he hands things over. A ‘surprise’ would see the JPY strengthen broadly and would also see the USD decline. While we think the chances are low today, it looks inevitable, in our view, that the BoJ normalises its policy stance given the change in Japan’s inflation and wage dynamics. We think new Governor Ueda could kick things off with a bang at his first meeting in late-April.

Global event radar: BoJ Meeting (Today), US Employment (Tonight), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), BoE Meeting (23rd Mar), US FOMC Meeting (23rd Mar), Eurozone CPI Inflation (31st Mar), China PMIs (31st Mar).

AUD corner

AUD continues to track sub $0.66, with the risk sensitive currency following the late-session slip in US equities (see above). Today, the AUD will be impacted by the outcome of the Bank of Japan meeting (no set time) and tonight’s US labour market data (12:30am AEDT). As discussed, we think the BoJ is more than likely to hold steady, though given the upswing in wages in Japan, there is a non-negligible chance BoJ Governor Kuroda announces one last surprise in his final meeting in charge. A change by the BoJ today would send a jolt across markets, with the JPY strengthening and the moves in USD/JPY flowing through to the other currencies.

On the assumption the BoJ keep things steady, the US labour market data will be the major event. With US Fed expectations becoming increasingly sensitive to the US data flow, as shown by the overnight moves in bonds to the partial data, market and AUD reaction to the non-farm payrolls report is likely to be binary, and could be quite large. A weaker result could see pricing for the Fed rate hiking cycle watered down, which should weigh on the USD, while a stronger outcome could support the case for the Fed to move by a larger 50bp clip later this month. This, in our view, would give the USD a boost, dampen risk sentiment, and exert more pressure on the AUD. Based on a look across the range of leading indicators this is where we think the risks reside.

As we mentioned yesterday, this heightened volatility around the incoming US and Australian economic data is likely to remain a feature of markets over the coming weeks as the outcomes will heavily influence what the US Fed and RBA do at their next few meetings.

However, while we see a bit more near term downside in the AUD given the diverging Fed and RBA outlooks, as we also flagged yesterday, when it comes to the AUD, interest rate differentials are only one part of the story. And in our view, the relative adjustment, which has weighed on the AUD over recent weeks, has now largely run its course. From a fundamental perspective, an offsetting force is the level of commodity prices. As shown, Australia’s terms of trade are now well above average. This could, in our opinion, act to limit further downside in the AUD from here.

AUD event radar: BoJ Meeting (Today), US Employment (Tonight), 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), AU Retail Sales (28th Mar), Eurozone CPI Inflation (31st Mar), China PMIs (31st Mar).

AUD levels to watch (support / resistance): 0.6490, 0.6522 / 0.6680, 0.6763

SGD corner

USD/SGD remains near its 100-day moving average (1.3537) with the US bond market swings counteracted by negative risk sentiment. Over the next 24hrs USD/SGD will be heavily influenced by the outcome of today’s Bank of Japan meeting (no set time) and tonight’s US labour market report. As outlined above, our base case is for the BoJ to hold steady, but there is a risk outgoing Governor Kuroda springs one last surprise which would be JPY positive and weigh on the USD (and USD/SGD).

Assuming the BoJ holds firm today, market attention will be on the US labour data. The large fall in US bond yields overnight, on the back of the softer lower tier data, shows how sensitive markets have become due to the Fed’s data-dependency. In our view, given it is an important piece of the puzzle, the market reaction to the US jobs report should be binary. A strong result should see market pricing for a 50bp lift in rates by the US Fed in late-March increase, which would be USD positive, and push USD/SGD higher. While the reverse is likely should the data disappoint. In our judgement, the risks are leaning towards another positive report. If realised, this could see USD/SGD spike up up towards 1.37.

SGD event radar: BoJ Meeting (Today), US Employment (Tonight), US CPI Inflation (14th Mar), US Retail Sales (15th Mar), China Activity Data (15th Mar), ECB Meeting (17th Mar), Singapore CPI (23rd Mar), BoE Meeting (23rd Mar), US FOMC Meeting (23rd Mar), Eurozone CPI Inflation (31st Mar), China PMIs (31st Mar).

SGD levels to watch (support / resistance): 1.3316, 1.3377 / 1.3590, 1.3620

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