• Upbeat vibes. Reports Iran proposed reopening Strait of Hormuz supported sentiment. Equities rose. AUD near top of its range. But oil markets sceptical.
• Event radar. US/Iran still in focus. Australian Q1 CPI due (Weds), as is US GDP (Thurs night). Five central banks meet including US Fed (Thurs morning).
Global Trends
Mixed fortunes across markets at the start of the new week. On the back of reports Iran, via Pakistani mediators, put forward a new proposal for reopening the Strait of Hormuz in exchange for the US ending its naval blockade, a few short-sighted asset classes perked up. US equities extended their upswing with the S&P500 (+0.1%) touching another record high, and with the USD drifting back cyclical currencies like the NZD (now ~$0.5909) and AUD (now ~$0.7186) strengthened. That said, its notable that it wasn’t all one-way traffic, with a few other asset classes seemingly more sceptical about how the future might unfold. Bond yields rose with the benchmark US 10yr rate edging up ~4bps to be at ~4.34%. And oil prices remain elevated. Brent crude ‘futures’ prices are around US$108/brl, while ‘dated’ brent prices, which is the physical spot-market that is a better reflection of near-term supply/demand dynamics, are north of US$113/brl (see chart below).
As flagged over the past few weeks, the situation in the Middle East is fluid, and given the parties involved more brinksmanship and bursts of market volatility should be expected for a while yet. Moreover, beyond the conflict we remain of the opinion that the effect on supply-chains and global energy might take months/quarters to clear up, not days/weeks, even on an assumption more ‘normal’ operations via the Strait of Hormuz (eventually) resume. The events since mid-February look set to cast a long shadow over the world economy with global growth weaker and inflation higher than predicted at the start of the year.
In addition to US/Iran developments, attention will also be on the five major central banks meeting this week (BoJ (today, no set time), Bank of Canada (Weds night AEST), US Fed (Thurs morning AEST), ECB and Bank of England (both Thurs night AEST)), as well as important US data points such as Q1 US GDP (Thurs night AEST) and the ISM manufacturing index (Friday night AEST). The China PMIs (Thurs) will also be in focus, as will Eurozone GDP/CPI inflation (Thurs AEST). All the major central banks meeting this week are expected to stay on hold with policymakers keeping watch on how high/long the jump in inflation might be at the expense of growth/jobs. On balance, with US GDP set to mechanically reaccelerate after the drag on activity last quarter from the prolonged government shutdown unwinds, coupled with potential ‘hawkish’ rhetoric from the US Fed (note, this will also probably be Fed Chair Powell’s last meeting at the helm) we think the USD may claw back some recently lost ground over the period ahead.
Trans-Tasman Zone
A more ‘hopeful’ view about the situation in the Middle East stemming from Iran’s reported push to get back to the negotiating table and reopen the Strait of Hormuz (see above) has supported cyclical currencies like the NZD and AUD at the start of the week. At ~$0.5909 the NZD is just above its 1-year average, while the AUD (now ~$0.7186) is trading around the top of the wide range it has occupied since 2023. The AUD has also perked up on the major cross-rates with gains of ~0.2-0.5% recorded against the EUR, JPY, GBP, CAD, and CNH over the past 24hrs.
This week, on top of what is going on in the Middle East, focus will also be on the major central bank meetings (including the US Fed on Thursday morning AEST), US GDP (Thurs night AEST), and Q1 Australian CPI (Wednesday). The Q1 inflation report will be the last major piece of local economic news released before the RBA meets on 5 May. Because of the sharp jump in fuel prices in March there should be a mechanical increase in headline inflation, with consensus penciling in a rise from 3.7%pa to ~4.8%pa. That said, the quarterly trimmed mean (the RBA’s preferred measure of core inflation) is expected to continue to hover at ~3.4-3.5%pa. Elevated, but broadly inline with the RBA’s February projections which pre-dated the US/Iran conflict and impact on energy prices.
Given the domestic and global events on the horizon, we expect bursts of AUD volatility over coming days. On net, while firmer Australian inflation might give the AUD a knee-jerk boost, with markets already assigning a ~75% chance of a RBA rate rise in May and ~63bps of hikes factored in by February the lasting impact may not be pronounced. The strong inflation/rising RBA interest rate narrative is a ‘known known’ and baked into the AUD, in our view. However, we don’t believe the looming growth hit from petrol prices and interest rates has been discounted. Neither have the global growth headwinds generated by the Middle East conflict and spillover effects on supply-chains, particularly on activity across Asia, and the prospect of the US Fed sounding more ‘hawkish’ later this week. These factors are why we believe the AUD could struggle to sustainably add to recent gains, especially as a lot of ‘good news’ looks priced in (the AUD is tracking ~1.5-2.0% above our ‘fair value’ estimates) and positioning (as measured by CFTC futures) is ‘net long’.
