• US/Iran. Latest reversal by President Trump boosted risk sentiment. US equities rose, oil & bond yields fell. USD weaker. AUD rebounds after a torrid run.
• Macro pulse. Energy/supply-chain disruption impacts only just starting to show. ECB raised rates overnight. RBA, BoJ, BoE, & US Fed in focus next week.
Global Trends
Middle East related headlines have been in the driver’s seat overnight with the (latest) reversal by President Trump generating a turnaround in sentiment. After proclaiming yesterday that the US will attack Iran “very hard” President Trump cancelled strikes and claimed an agreement to end hostilities could be signed “maybe this weekend”. The recent bout of turbulence across markets may have been a catalyst for the more positive rhetoric given our TACO index (i.e. “Trump Always Chickens Out”) had been hovering in a region that previously caused officials to backpedal.
Short-sighted/headline chasing markets reacted positively to the news with equities rising (US S&P500 +1.8%, tech-focused NASDAQ +2.5%), bond yields falling (US rates fell ~8-9bps), oil declining (brent crude -2.9%), and the USD weakening. USD/JPY slipped back under ~160, GBP nudged up (now ~$1.3425), and EUR rose modestly (now ~$1.1580). Also somewhat supporting the EUR was the first interest rate hike of this cycle by the European Central Bank. That said, this was priced in and the balanced communication by the ECB about the outlook did little to move the needle regarding future moves with another ~2 rate increases factored in by February. Elsewhere, after a bit of a torrid run the NZD rebounded towards its 1-year average (now ~$0.5836) and the AUD relatively outperformed over the past 24hrs (now ~$0.7052).
On our figuring this could be the ~39th/40th time President Trump has suggested a deal with Iran is “imminent” in either social media posts or interviews since late-March. Time will tell if things hold true. However, as outlined before, the conflict appears closer to the end than the beginning, yet this may only be “phase 1” with the spillover impacts on supply chains and energy set to cast a long shadow on the world economy. Restarting oil production and repairing damaged infrastructure could take months/quarters, not days/weeks. It might be a similar story when it comes to getting shipping traffic via the Strait of Hormuz back to pre-conflict run rates. The positive tone may underpin risk sentiment and keep the USD under pressure near-term. But as seen before, things can reverse course quickly. Moreover, the pick up in momentum in the US economy and jobs market, as well as inflation risks could see the US Fed sound more ‘hawkish’ at next week’s meeting (next Thurs morning AEST). If realised, we think this may be USD supportive.
Trans-Tasman Zone
The upbeat market vibes stemming from the (latest) announcement by President Trump that a deal with Iran is close to being signed off has helped the NZD and AUD recoup some lost ground. At ~$0.5836 the NZD has edged up towards its 1-year average, and the AUD (now ~$0.7052) is around where it was tracking on Tuesday. Relative strength on the crosses also gave the AUD a hand with the backdrop helping the AUD strengthen by ~0.4-0.6% against EUR, JPY, GBP, and CNH, while there was a larger ~1% gain versus CAD.
As outlined above and previously, we have been down this road before, and things may fall apart/reverse course quickly given the participants involved. Irrespective, while the conflict could be nearing a conclusion the effects on the global economy are only starting to bubble to the surface. The prolonged shutdown of energy production, and spillover on other products/areas such as fertilizer, construction materials, semi-conductors might take some time to clear up. Downside growth and upside inflation risks remain, particularly for Asia given ~80-90% of the oil/gas shipped via the Strait of Hormuz is destined for the region.
For the AUD the more positive risk backdrop could be supportive near-term, however we think upside potential is capped, particularly as positioning (as measured by CFTC futures) is already ‘net long’. Signs Australian economic momentum is cooling because of higher fuel costs and interest rates is raising doubts the RBA will tighten policy again this cycle. Markets agree with only ~15bps of tightening now priced in by next March. The RBA meets next Tuesday and given the run of sluggish domestic data it may repeat it has “space” to assess conditions. By contrast, the improvement in US growth and upturn in the jobs market, as well as lingering inflation risks, might see the US Fed (Thurs morning AEST) jettison its easing bias and/or signal there is a chance of hikes down the track via an upward shift in its interest rate projections.
Given the cross-currents we feel yield differentials may have peaked and could be starting to turn against the AUD. This might be compounded by the unfolding slowdown in Australian growth and challenges faced by the global/Asian economy from the Middle East conflict and disruptions to energy/supply-chains.
