• USD firmer. A further rebound in US bond yields on the back of stronger US data and comments by a Fed official has supported the USD.
• China focus. China data, which includes Q1 GDP, released today. Growth should mechanically lift following the end of COVID-zero. But are expectations too high?
• AUD range trading. AUD held up in the face of a firmer USD overnight. The China data could generate some AUD volatility today.

The rebound in the USD Index has continued, with the USD stronger against the other major currencies over the past 24hrs. EUR has dipped back towards ~1.0930 (~1.3% below last week’s year-to-date high), GBP eased a little lower, and USD/JPY has risen to a ~5-week high (~134.50). And while the NZD also lost a bit more ground, the AUD has tracked in a tight range centered on ~$0.67.

Another lift in US bond yields has underpinned the USD. US 2-year yields have risen another ~10bps to 4.2%, a high since 23 March, while the 10-year yield has also moved higher (now ~3.6%). The further easing in banking sector worries, a stronger than expected Empire (NY) manufacturing survey (the index jumped back into ‘expansionary’ territory for the first time in 5-months), and ‘hawkish’ comments from another Fed official boosted US interest rate expectations. The Fed’s Barkin, a non-voting member in 2023, noted that he wants to see “more evidence that inflation is settling back to our target”. This mix saw markets add to their near-term Fed rate hike bets, while pricing of rate cuts later this year was again pared back. Given the sticky and high US core/services inflation we continue to believe that market expectations looking for the Fed to cut rates in H2 2023 are misplaced. In our view, a further upward repricing of these longer-dated rate cut expectations should provide the USD with some more support over the period ahead. As should renewed volatility. As our chart shows, volatility across the major assets has fallen recently. However, as the ‘aftershocks’ of the abrupt global tightening cycle continue to show up, we expect volatility to again pick up. This is a backdrop that normally favours currencies like the USD, EUR and JPY over cyclical ones like the AUD.

Today, the focus will be on the China activity data batch which includes Q1 GDP (12pm AEST). While China’s GDP should mechanically lift following the move away from COVID zero, we think the growth pulse risks underwhelming. In our judgement, the pent-up demand following the removal of restrictions doesn’t look to have been as strong as it was in other economies. Added to that, given the global slowdown, China’s industrial activity may also not have snapped back sharply. If realised, softer China data could add to concerns about global growth, dampening risk sentiment and supporting the USD.

Global event radar: China GDP (Today), Eurozone PMIs (Fri), US GDP (27th Apr), Bank of Japan Meeting (28th Apr), RBA Meeting (2nd May), Eurozone CPI (2nd May), ECB Meeting (4th May), US Fed Meeting (4th May), Fed Chair Powell Speaks (4th May), US Jobs Report (5th May), US CPI (10th May), Bank of England Meeting (11th May).

AUD corner

AUD has held up well in the face of a firmer USD overnight. AUD/USD has traded in a relatively narrow range centred on ~$0.67, with the AUD clawing back some lost ground against the JPY, EUR and GBP, and AUD/NZD continuing to tick higher (now ~1.0830).

There are a few AUD-centric events on the radar today. Domestically, the minutes of the April RBA meeting are released (11:30am AEST). Governor Lowe’s detailed speech following the decision to ‘pause’ the hiking cycle in early-April suggests the minutes shouldn’t be overly market moving, but any further insights into how the RBA sees policy unfolding still need to be watched for. Offshore, the China activity data for March and Q1 GDP are in focus (12pm AEST). As outlined above, while we expect the data to show momentum quickened following the shift away from COVID zero, we think the rate of growth risks underwhelming consensus forecasts. And for the AUD what is particularly important is the growth mix. Commodity-intensive industrial activity is the more influential part of China’s growth story for the AUD. Given the global growth slowdown this is an area that we believe could disappoint, with consumer spending set to be the relatively stronger part of China’s recovery over 2023. As our chart shows, this combination tends weigh on AUD/EUR given the Eurozone’s stronger linkages to China’s services sectors.

Overall, we remain of the opinion that the AUD should continue to face a challenging backdrop over the next few months. Renewed market volatility and slower global activity, as the effects of the policy tightening cycle continue to manifest, have historically created headwinds for currencies like the AUD leveraged to the global cycle. At the same time, the RBA’s more pragmatic approach means relative interest rate differentials are also shifting against the AUD.

AUD event radar: China GDP (Today), NZ CPI (Thurs), Eurozone PMIs (Fri), AU CPI Inflation (26th Apr), US GDP (27th Apr), Bank of Japan Meeting (28th Apr), RBA Meeting (2nd May), AU Retail Sales (3rd May), ECB Meeting (4th May), US Fed Meeting (4th May), US Jobs Report (5th May), US CPI (10th May), Bank of England Meeting (11th May), AU Wages (17th May), AU Jobs Report (18th May), RBNZ Meeting (24th May).

AUD levels to watch (support / resistance): 0.6620, 0.6662 / 0.6744, 0.6800

SGD corner

USD/SGD has continued to bounce back with the pair up near ~$1.3340. This is ~1% above last Thursday’s low point. The upswing in US bond yields on the back of some better-than-expected US data, a further easing of banking sector concerns, and ‘hawkish’ rhetoric from US Fed officials has supported the USD (see above).

We think the USD’s rebound can extend a little further. In our opinion, the other US Fed officials speaking throughout this week may continue to push back on market pricing looking for interest rate cuts later this year given the still high US inflation and tight labour market. We expect an upward repricing in longer-dated US interest rate expectations to be a USD positive. Similarly, a softer than anticipated China data batch (released today) may fan concerns about the global economy, and if realised, this can dampen risk sentiment and cyclical currencies like the SGD and broader Asian FX. In our view, this combination may see USD/SGD edge up towards the top of its recent $1.3150-1.3450 range.

SGD event radar: China GDP (Today), Eurozone PMIs (Fri), US GDP (27th Apr), Bank of Japan Meeting (28th Apr), RBA Meeting (2nd May), Eurozone CPI (2nd May), ECB Meeting (4th May), US Fed Meeting (4th May), US Jobs Report (5th May), US CPI (10th May), Bank of England Meeting (11th May).

SGD levels to watch (support / resistance): 1.3200, 1.3245 / 1.3365, 1.3400