• US markets. US stocks rose with the tech sector leading the way. USD Index treads water. The AUD ticked up thanks in part to strength on the crosses.
• Data flow. Limited data releases in Australia & the US. RBNZ meets tomorrow. Will the RBNZ deliver its first interest rate hike of this cycle?
Global Trends
It has been a relatively positive start to the new week in US markets. US equities rose overnight (S&P500 +0.7%), with the tech focused NASDAQ outperforming (+1.1%). Oversold semiconductor and AI stocks rebounded after last week’s falls. Elsewhere, long end bond yields held steady (at ~4.47% the US 10yr is just above its 3-month average) and the US 2yr rate slipped back slightly (-3bps to ~4.11%). Across commodities, WTI oil (now ~US$68.68/brl) and gold (now ~US$4178/ounce) consolidated. It was a similar story for the USD with EUR treading water (now ~$1.1444), while GBP nudged up (now ~$1.3393) and USD/JPY rose (now ~162.05, just below its multi-decade peak). The NZD has been range bound ahead of tomorrow’s RBNZ meeting where a 25bp rate hike is anticipated (now ~$0.5703), and the AUD edged a bit higher (now ~$0.6958).
Data wise, the US ISM services index was released. It dipped slightly but at 54 remains in ‘expansionary’ territory. New orders remain at healthy levels and employment/hiring intensions moved back into positive territory for the first time since February. On balance, as our chart shows, the improvement in the US ISM surveys over recent months point to an acceleration in US economic activity over the period ahead. Markets are now only fully factoring in a US Fed rate rise by December, and less than a 50% chance another hike is delivered after that. We think more signs the US economy is on firm footing could see markets bring forward the expected timing of US Fed policy tightening, which if realised may give the USD a boost down the track.
In the near-term however, given the global economic data calendar is quiet, without an exogenous shock we expect market volatility to be subdued. Things might heat up next week with US CPI (14th July), an appearance by Fed Chair Warsh (15th July), China GDP (15th July), and US Retail Sales (16th July) on the schedule.
Trans-Tasman Zone
The upbeat tone and positive performance across US equities overnight, as well as relative strength on the cross-rates have given the AUD a helping hand. The AUD has risen by ~0.2-0.7% against the EUR, JPY, NZD, CAD, and CNH over the past 24hrs. At ~$0.6958 the AUD is at a ~2-week high, however taking a step back shows the AUD is still around the lower end of the range occupied the past few months. The NZD (now ~$0.5703) has tread water, and is ~1.3% above its recently touched multi-month low.
The Australian data calendar is limited for a while with the next major releases the jobs report (23rd July) and Q2 CPI (29th July). On balance, we expect push-pull forces to keep the AUD contained over the near-term. Despite the adjustment in US Fed rate hike pricing, relative AU-US yield spreads are still indicating that the AUD is facing more headwinds than tailwinds. The RBA looks to be closer to the end than the beginning of its tightening phase (there is only a ~42% chance of another RBA rate rise priced into the interest rates curve), and the debate around the US Fed is on the timing (not direction) of its cycle. This unfolding shift may be compounded by the slowdown in Australian growth and/or challenges faced by the Asian economy from the prolonged disruptions to energy/supply-chains.
Across the Tasman, focus will be on the RBNZ decision (Weds 12pm AEST) and press conference (Weds 1pm AEST). In our view, the improvement in NZ economic growth, upturn in NZ inflation, and ‘accommodative’ level of RBNZ interest rates means it is a matter of when, not if, the RBNZ kicks off its tightening cycle. We expect the RBNZ to deliver a rate hike this week and signal there may be more to come. Markets agree with the direction with ~4 RBNZ rate rises factored in by June 2027, however, there is only a ~70% chance assigned to a move occurring this week. If the RBNZ announces a rate increase we think the NZD (which is currently tracking a couple of cents below our ‘fair value’ model) could strengthen. Moreover, we believe that the relative outperformance of the NZ economy and shift in interest rate differentials should see AUD/NZD gradually lose ground over time.
