• Market wobbles. Fading optimism about the latest US/Iran deal pushed up oil prices. US bond yields higher. USD firmer. AUD & NZD slipped back.
• Data pulse. US jobs report in focus tonight. Data could generate a binary market reaction. RBA next week. No policy change anticipated.
Global Trends
A few renewed, albeit modest, wobbles across markets with Middle East related news a factor. Optimism the US and Iran might reach a sustainable deal has been shaken, and there have been flare ups across the region. Reported attacks by Houthis against forces in Yemen suggest the conflict may be widening. With respect to the US/Iran the imminent deal that has been touted doesn’t look like it may get off the ground. Iranian media reported that the draft agreement indicated vessels from the US and Israel would be barred from crossing the Strait of Hormuz and/or compensation might be required from vessels from some other nations. As outlined previously, we have been down this road several times before since the conflict kicked off in February. More twists and turns are probable. Furthermore, simply reopening the Strait of Hormuz doesn’t mean energy flows will revert to pre-conflict run rates quickly because of things like damaged infrastructure, shipping capacity, insurances, and issues related to reservoir pressure.
Oil prices have risen with Brent Crude (+4.6%) back above US$83/brl. The renewed inflation pulse from the rebound in oil, combined with a few ‘hawkish’ vibes from US Fed officials saw bond yields lift. US rates climbed ~6-7bps across the curve overnight, with markets pricing in a ~57% chance the Fed hikes rates in September and ~49bps of tightening factored in by next June. According to a report in the FT, Fed Chair Warsh would be prepared to raise rates in September if inflation readings released in coming weeks “are hot” and markets ratchet up expectations for higher borrowing costs. Elsewhere, US equities consolidated (S&P500 -0.2%). In FX the USD index is a bit firmer with EUR slipping back (now ~$1.1522) and USD/JPY nudging up (now ~158.49). The NZD (now ~$0.5867) and AUD (now ~$0.7030) lost a bit of ground.
Middle East developments might could continue generate intermittent bursts of market volatility. On top of that, attention tonight will also be on the monthly US jobs report (10:30pm AEST). The US labour market has been up and down the past few months. The data for July could trigger a ‘binary’ market reaction and the USD. Signs the US labour market is doing ok without being great might see markets pare back some of their US Fed rate hike expectations, which if realised may drag on the USD. By contrast, stronger than expected data could see participants add to their near-term US Fed rate rise expectations and give the USD a boost.
Trans-Tasman Zone
The gyrations across markets and firmer USD on the back of some ‘hawkish’ US Fed rhetoric and/or the rebound in oil prices stemming from less optimistic news regarding a US/Iran deal has exerted a bit of downward pressure on the AUD and NZD (see above). At ~$0.5867 the NZD is back near its ~1-year average while the AUD (now ~$0.7030) has drifted towards where it was tracking last Friday. The AUD has also softened a fraction on most of the major cross-rates with falls of ~0.1-0.4% recorded against the EUR, GBP, and CNH over the past 24hrs.
As discussed above, developments regarding the US/Iran ‘deal’ could generate more bouts of volatility and swings in oil prices. In addition, the monthly US jobs report is also due tonight (10:30pm AEST). The US jobs data has been volatile the past few months, and this may have continued in July. It is hard to judge and we think there might be a knee-jerk ‘binary’ market reaction to the US data. A stronger than predicted US jobs report could bolster near-term US Fed rate hike expectations, with a resultant lift in the USD likely to weigh on AUD and NZD. By contrast, underwhelming US jobs data might see traders pare back their US Fed tightening bets, which in turn gives the AUD and NZD a little boost.
Beyond the data-driven short-term volatility in the USD, we remain of the view that upside potential in the AUD should be limited, and there are more downside risks lurking over the weeks ahead. As flagged before, we feel the RBA is closer to the end than the beginning of its tightening cycle given the unfolding slowdown in the Australian economy. Markets agree with nothing priced in for next Tuesday’s RBA meeting and only ~17bps of further rate hikes discounted by next February. On balance, we believe concerns about domestic growth because of higher interest rates and loss of momentum in housing, the shift in yield spreads, and potential for more volatility in asset markets due to geopolitics or valuation worries could be possible headwinds for the AUD over the period ahead.
