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• Quiet start. Limited moves across most markets. US equities firmer. Long-end bond yields a touch higher, as is the USD.
• Commodities. Copper hit a record as strong demand comes up against constrained supply. There are cyclical & structural forces at play.
• AUD swings. After its positive run AUD slipped back slightly. Policy divergence, rising commodity prices, & buoyant equities suggest the AUD is undervalued.

As is usually the case, it was a relatively quiet start to the new week across global markets. No major economic data was released which could shift the dial. On the speaker front, there were a few US Fed members on the wires, and they didn’t deviate from their recent ‘patient’ message. The normally ‘hawkish’ Atlanta Fed President Bostic reiterated that he sees a higher ‘steady state’ for interest rates and Cleveland Fed President Mester noted that she now sees two rate cuts in 2024 rather than three (although market pricing is factoring in even less). Fed Vice Chair Jefferson indicated that although the April US inflation data is “encouraging” more time is needed to be sure the trend is secure. Bond yields drifted up modestly with the US 10yr rate rising ~2bps (now 4.44%).

Elsewhere, equities remain firm with the tech-heavy US NASDAQ (+0.7%) touching a record high. There were also gains across European stock markets. Base metal prices also extended their upswing. Copper has been in the spotlight after reaching a record level. As our chart shows, the copper price is now ~34% above where it was at the end of 2022. Strong demand due to a cyclical pick up in global activity, and strong underlying structural forces stemming from fast-growing sectors like renewables and AI are coming up against tight supply thanks to weather and production setbacks. By contrast, oil prices slipped (WTI crude -0.5%) with the events in Iran not generating an impact. In FX, the USD index is marginally higher with a tick up in USD/JPY (now ~156.20) on the back of the positive risk vibes the driver. EUR (now ~$1.0855) and GBP (now ~$1.2705) have tread water, while NZD (~$0.6105) and AUD (now ~$0.6667) lost a bit of ground. Although this comes after their recent strong performance.

Globally attention will be on US Fed speakers tonight, with Canadian CPI inflation also released (10:30pm AEST). Fed Governor Waller, an influential policymaker, is discussing the outlook (11pm AEST). We think that a similar ‘patient’ message in terms of near-term actions is likely, but he could also reiterate the central view that if the disinflation trend holds, some policy easing later this year is on the cards. We feel this may exert a little downward pressure on the USD. Markets are assuming the first Fed rate cut by November, with a second discounted by January.

AUD Corner

Following its recent strong run the AUD took a breather overnight. Despite higher equity markets and base metal prices, the slightly firmer USD has seen the AUD drift back down towards ~$0.6670. The AUD also lost a bit of ground on some of the major crosses with falls of 0.3-0.5% recorded against EUR, CAD, CNH, and GBP over the past 24hrs.

Locally, the minutes of the May RBA meeting are due today (11:30am AEST). Given the post-Meeting press conference and detailed update contained in the already released Statement on Monetary Policy the minutes shouldn’t spring many surprises, though we will be looking for comments regarding if another rate rise was considered. We continue to think that the RBA is diverging from its peers. In our judgement, sticky domestic services inflation, Australia’s lackluster productivity, income support from the stage 3 tax cuts, and fiscal impulse looks set to keep the RBA on hold for longer and points to relatively less interest rate relief over the medium-term. Diverging monetary policy expectations between the RBA and others should be AUD supportive, in our opinion (see Market Musings: AUD outperformance to continue?). Indeed, when combined with the lift in base metal prices, low volatility, and buoyant equity markets we think the AUD is undervalued around current levels. The average across our suite of models suggests AUD/USD is ~2 cents below ‘fair value’.

The diverging macro and central bank trends may be on display again tonight with CPI data out of Canada (10:30pm AEST) forecast to show a further slowdown in core inflation. If realised, we feel this should reinforce expectations that the BoC could deliver its first rate cut by July. Similarly, a step down in UK CPI inflation tomorrow would support calls for the first BoE rate cut by August. By contrast, the first RBA rate cut isn’t fully discounted until early 2025. We believe a further adjustment in yield differentials should keep AUD/CAD and AUD/GBP supported. Also, after being on the backfoot so far in May, AUD/NZD (now ~1.0920) might bounce back over the period ahead if the RBNZ (which meets tomorrow) opens the door to kicking off its easing cycle a little sooner than the Q2 2025 start date it was projecting a few months ago.

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