• Policy divergence. JPY continues to weaken with the BoJ’s stance continuing to diverge from the rest of the world. AUD near a multi-month high.
• Fed talk. Chair Powell testifies to Congress this week. Markets still aren’t pricing in the Fed’s views. A shift up could give the USD some support.
• China stimulus. More stimulus to support the faltering recovery is anticipated, but we think China may not meet the markets seemingly lofty thinking.
US markets had a relatively quiet end to a busy week on Friday. US equities retreated from their 14-month highs (S&P500 -0.4%), while bond yields increased (US 2-year rate rose ~7bps to 4.71%, and the 10-year was up ~5bps to 3.76%), and the USD nudged up slightly, largely on the back of the ongoing rise in USD/JPY. The Bank of Japan remains a central bank outlier following Friday’s (as expected) decision to leave its settings unchanged with the policy rate still at -0.1% and the yield curve target for 10-year Japanese government bonds remaining at 0% (+/- 50bps).
The divergence between the BoJ and the other major central banks is weighing on the JPY, and it is propelling the Japanese stock market higher (the Nikkei225 is at levels last seen in early 1990). At ~141.75 USD/JPY is near a ~7-month high, while EUR/JPY hit a ~15-year high, and AUD/JPY (now ~97.45) is within striking distance of its 5-year peak. Japanese policymakers remain skeptical that the upswing in Japanese inflation will last. In our view, the risks the BoJ is falling ‘behind the curve’ continue to build, this in turn is creating asymmetric risks around the JPY (i.e. there is more scope for a larger snapback in the JPY over time) given we believe it is inevitable the ultra-accommodative stance will be jettisoned. Indeed, when asked, BoJ Governor Ueda refused to rule out the possibility of a change at the 28 July meeting.
The move higher in US yields, and stabilization in the beleaguered USD, was driven by Fed comments. Fed Governor Waller noted that the high core inflation meant that some more tightening was probably needed, and Richmond Fed President Barkin stated he was “comfortable doing more” if the data warrants it. This week, Fed Chair Powell testifies to Congress (Thursday and Friday morning AEST). Chair Powell’s testimony, the Bank of England policy decision (Thursday AEST) where another ‘hawkish’ 25bp hike is expected, the Eurozone/US PMIs (Friday AEST), and news regarding China policy stimulus will be in focus this week.
In terms of the Fed, Chair Powell is speaking as the voice of the FOMC, as such we expect him to reiterate the updated central view that further rate hikes are projected over the next few meetings in order to bring down sticky inflation, and that rate cuts are a long way off. In our judgement, markets are underestimating the Fed’s resolve (another full rate hike still isn’t factored into the interest rate curve), and a ‘hawkish’ push by Powell could see US rate expectations adjust higher. If realised, we believe this may give the USD some renewed support.
Global event radar: Bank of England Meeting (Thurs), Fed Chair Powell Speaks (Thurs/Fri), Eurozone/UK/US PMIs (Fri), ECB Sintra Conference (28th June), China PMIs (30th June), Eurozone CPI (30th June), US PCE Deflator (30th June).
The AUD consolidated its recent gains on Friday to be hovering up near ~$0.6875. This follows an impressive ~2% rally earlier in the week. On the crosses, AUD/EUR is still tracking near its highest level since mid-March, and AUD/NZD remains north of ~1.10. AUD/GBP has drifted back slightly to now be just above its 50-day moving average (~0.5341) with Thursday’s BoE meeting where another ‘hawkish’ 25bp rate rise is predicted in focus. Elsewhere, expectations of further policy stimulus has seen AUD/CNH hit its highest level since mid-2021, while AUD/JPY has continued to move higher as the BoJ remains an central bank outlier in a world of rising interest rates (see above). AUD/JPY (now ~97.45) is nearing a 5-year high.
It has been a swift turnaround in the AUD over recent weeks. After a torrid May, the AUD has snapped back thanks to the June RBA rate hike and shift up in interest rate pricing, positive risk sentiment, and expectations China will unveil stimulus measures to support its faltering recovery. The AUD has risen by ~5.8% so far this month, and while the AUD tends to do well in June (the AUD has appreciated in 21 of the past 38 June’s) the speed and size of the month is historically large. We continue to think that the AUD has moved too far too fast, and that the upturn may soon run out of steam as external headwinds re-emerge (see Market Musings: AUD: break-out or bull-trap?)
As discussed above, we expect Chair Powell to stress that the Fed still has more work to do when he testifies to US Congress later this week (Thursday and Friday AEST). This could see US interest rate pricing shift up towards the Fed’s view, which in turn may help boost the USD, particularly as we believe the last legs of the RBA rate hiking cycle appear factored in (another ~2 RBA rate hikes over the next few months are now discounted). And while more stimulus from China is anticipated, we think high debt levels and worries about financial stability mean a targeted approach is more likely. Failure by Chinese policymakers to match the markets seemingly lofty stimulus predictions could be a drag on the AUD.
Given the strong correlation to risk markets, another factor underpinning the AUD’s revival has been the move higher in global equities. Our analysis has found that the recent rise in US equities may be more a reflection of additional liquidity rather than improving fundamentals. The extra liquidity pumped into the financial system as the US Treasury drew down its General Account during the debt ceiling standoff has coincided with the stock market (and AUD) upswing (see chart below). However, with the depleted TGA set to be replenished over the next few weeks, the US Fed still undertaking Quantitative Tightening, and a large ECB TLRTO repayment coming up, risk markets could be facing a bit of a ‘liquidity vacuum’ over the period ahead. Based on its positive relationship increased volatility and/or a pullback in equities could exert some pressure on the AUD.
AUD event radar: RBA Meeting Minutes (Tues), Bank of England Meeting (Thurs), Fed Chair Powell Speaks (Thurs/Fri), Eurozone/UK/US PMIs (Fri), ECB Sintra Conference (28th June), AU Monthly CPI (28th June), AU Retail Sales (29th June), China PMIs (30th June), Eurozone CPI (30th June), US PCE Deflator (30th June).
AUD levels to watch (support / resistance): 0.6726, 0.6781 / 0.6925, 0.6975
USD/SGD is tracking near its 100-day moving average (~$1.3371), with the lift in US bond yields on the back of some ‘hawkish’ Fed rhetoric helping the USD find a bit of support on Friday. Elsewhere, EURSGD remains near its 1-month highs (~1.4633), while JPYSGD is now only a fraction above its October 2022 lows. As outlined above, the JPY has remained under pressure following the BoJ’s as expected decision to keep its ultra-accommodative settings in place. This is in stark contrast to the other major central banks. In our view, accelerating Japanese inflation and JPY weakness suggests it is inevitable tweaks are made by the BoJ at some point. We believe at current low levels, there are more upside than downside risks to the JPY.
This week, news on the potential China stimulus package, the Bank of England policy decision (Thursday), the Eurozone PMIs (Friday), and testimony by Fed Chair Powell (Thursday and Friday) will be the global focus. As discussed, we believe that while more stimulus measures are probable, the risks are tilted to China underwhelming the markets high expectations. At the same time, we think Chair Powell could sound ‘hawkish’ relative to interest rate pricing, given he is likely to reiterate that the Fed is forecasting another 2 rate hikes over the next few meetings. In our opinion, an upward adjustment in US interest rate pricing could give the USD (and USD/SGD) some renewed support.
SGD event radar: Bank of England Meeting (Thurs), Fed Chair Powell Speaks (Thurs/Fri), Singapore CPI (Fri), Eurozone/UK/US PMIs (Fri), ECB Sintra Conference (28th June), China PMIs (30th June), Eurozone CPI (30th June), US PCE Deflator (30th June).
SGD levels to watch (support / resistance): 1.3200, 1.3320 / 1.3500, 1.3550