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European central banks leading the way?

• Quiet markets. US equities consolidated, while 10yr yields ticked up. USD a touch firmer. AUD’s post RBA pull-back extended a bit further.
• European divergence. Sweden’s Riksbank cut rates. This follows the Swiss National Bank. Will the ECB be next? BoE tonight. It may be more ‘dovish’.
• Global activity. China trade data due today. Various leading indicators for global industrial activity, like the copper price, have been improving.

Fairly narrow ranges in global markets overnight with limited new information coming through to shake things up. US equities consolidated with the S&P500 ending the day unchanged after moving higher over the prior four sessions. Yield curves steepened slightly with long-end rates drifting higher. The ~4bp lift in the US 10yr yield unwound yesterday’s dip (now ~4.49%). The markets US Fed expectations are largely unchanged with a full rate cut discounted by November. US Fed members continue to reiterate the ‘higher for longer’ mantra, but this is already well known. Boston Fed President Collins noted that the recent positive data surprises suggest policy may need to be kept at current levels “until we have greater confidence” inflation is heading sustainably back to the 2%pa target.

Across commodities, while oil prices increased (WTI crude +1.1%), industrial metals slipped back with copper and iron ore shedding ~1.4%. That said, as pointed out yesterday, copper remains well up for the year and near the top of its multi-year range. Given copper’s wide-ranging uses this is a positive sign for future global industrial activity. In FX, the USD is a touch firmer with EUR near ~$1.0750 and GBP around ~$1.25. USD/JPY edged up a bit (+0.5% to ~155.50) despite Bank of Japan Governor Ueda noting he is watching the impact of the weak JPY on inflation, and if upside risks lift it “will be appropriate” to adjust policy at a faster pace. Elsewhere, USD/SGD is treading water (now ~1.3560) while the AUD’s post RBA pull-back has extended a little further (now ~$0.6580).

In Europe, as was anticipated Sweden’s Riksbank cut interest rates by 25bps. This was the first move this cycle and makes the Riksbank the second G10 FX central bank to lower rates (the Swiss National Bank moved in March). The Riksbank indicated it expects to cut rates twice more in H2 2024. Sweden is a small open economy, and hence it is often impacted by global/regional trends quickly. We think that Europe is at the forefront of the shift in policy. The ECB is expected to follow in June, while tonight, given the slowdown in inflation and cracks emerging across the UK economy, the Bank of England (9pm AEST) might deliver a ‘dovish’ message about the possibility of its own easing cycle coming closer into view. Markets are factoring in the first BoE rate cut by August. We think this could exert pressure on GBP, which in turn may generate some short-term support for the USD.

AUD Corner

The unwind in the markets built up ‘hawkish’ RBA rate hike bets, and some softness in industrial metals prices has kept the AUD on the backfoot. At ~$0.6580 the AUD is ~1% below its recent peak and back down where it was trading last Friday. The AUD has also lost some ground on the crosses with falls of 0.2-0.3% recorded against the EUR, GBP, NZD, CAD, and CNH over the past 24hrs. AUD/JPY has bucked the trend with the pair nudging up to ~102.30. We remain of the view that over the medium-term, AUD/JPY has more downside than upside potential and we see it converging lower towards where fundamental drivers like longer-term interest rate expectations are suggesting it should be (we are forecasting AUD/JPY to fall to ~97 by Q3).

Despite its recent setback, which we had anticipated given we thought fickle/short-sighted traders would we underwhelmed if the RBA didn’t revert back to its ‘explicit’ language about another potential rate rise, we continue to hold a positive medium-term bias towards the AUD. As our chart shows, even after its recent dip the AUD is still in the top quartile of its 1-year range on most cross-rates. Today China trade data for April is due (no set time), and tonight the Bank of England meets (9pm AEST). Based on the upturn in China’s credit impulse and more upbeat signals from other leading indicators for global industrial activity we expect import and export growth to pick up. If realised, we believe this could be a positive for cyclical assets like the AUD.

Similarly, while the RBA may not raise rates again, we continue to think that the stickiness in domestic inflation, a resilient labour market, incoming stage 3 tax cuts, and prospect of more cost-of-living relief at next week’s Federal Budget should see the RBA lag its peers in terms of when it starts and how far it goes in the next easing cycle. The diverging monetary policy outlooks between the RBA and others should be AUD supportive over the medium-term, in our view. A dovish tone by the BoE at tonight’s meeting could reinforce these trends and help AUD/GBP (which we feel is too low based on longer-dated yield differentials) tick up.

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Twists & turns

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