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• Mixed signals. European equities rose, but US markets were a bit more cautious. Long-end bond yields eased. A softer EUR supported the USD Index.
• AUD base? The consolidation in USD/CNH & firmer base metal prices helped the AUD tick up slightly. Offshore forces will drive the AUD near-term.
• Event radar. European/US PMIs (today), trends in China, & speeches by Fed Chair Powell & ECB President Lagarde later this week are in focus.

A mixed performance across markets with news flow limited. Bond moves remain in focus. Time will tell but from our perspective there are some tentative signs things may be settling down after the recent jump up in yields. After hitting a fresh ~16-year high intra-day the US 10-year yield (now 4.33%) drifted back a bit to be on net little changed from yesterday. European 10-year yields slipped 6-9bps, largely retracing the rise from a day earlier. Yesterday in Japan the 10-yr JGB rate touched its highest level since 2014 (~0.66%) with the Bank of Japan not wading into markets given the move up has been somewhat orderly. At ~4.27% the Australian 10-year yield is also at the top-end of the range it has occupied since early-2014.

Following on from the more positive Asia session European equities rose (EuroStoxx50 +0.8%). However, US markets adopted a more cautious tone. The S&P500 ended the day slightly lower (-0.3%) with banks under pressure after S&P followed Moody’s lead in cutting the ratings of some smaller US lenders due to the ‘tough’ climate. Concerns about the health of the US consumer were also raised after Macy’s reported negative sales growth and noted that credit card delinquencies are accelerating, while Dick’s Sporting Goods also called out weaker sales and excess inventory. Tomorrow’s results announcement by the AI bellwether Nvidia will be closely watched given the hype around the sector.

In FX, the USD Index edged up modestly with EUR (-0.4%) and GBP (-0.2%) tracking the dip in European yields and with higher gas prices dampening regional sentiment. USD/JPY (-0.3%) is hovering just under ~146 while USD/CNH is above ~7.30. Authorities in China continue to show their discomfort about the recent currency weakness by setting the daily CNY fix at a record distance away from the estimated level. The gap has exceeded 1000pips twice in the past three sessions. At the same time policymakers have also pulled other levers to engineer a funding squeeze to make it more expensive to short the yuan. The consolidation in USD/CNH and higher base metal prices (copper +1%, iron ore +0.2% after a ~3% rise yesterday) has helped the AUD nudge up (now ~$0.6423).

The latest Eurozone (6pm AEST), UK (6:30pm AEST) and US (11:45pm AEST) PMIs are released today, with Fed Chair Powell and ECB President Lagarde speaking at the Jackson Hole Symposium later in the week (Saturday morning AEST). In our opinion, signs services sectors are cooling, particularly in the US, may see the USD give back some ground. Similarly, on the policy front we don’t expect strong signals from Fed Chair Powell regarding near-term steps outside of the recent rhetoric that they are watching the data or that easing may be a while away. But as our chart shows, compared to mid-April a ‘higher for longer’ Fed outlook now looks more appropriately priced. We think sticking to the script could underwhelm the buoyant rates markets and exert pressure on the USD.

Global event radar: Eurozone PMIs (Today), Jackson Hole Symposium (Thurs-Sat), US Fed Chair Powell Speaks (Sat), China PMIs (31st Aug), Eurozone CPI (31st Aug), US PCE Deflator (31st Aug), US Jobs (1st Sep).

AUD corner

The AUD has ticked up slightly with the consolidation in USD/CNH following another significantly stronger than anticipated daily CNY fixing, coupled with the rise in base metal prices and lower long-end bond yields generating some support (see above). However, at ~$0.6423 the AUD remains near the bottom-end of its 2023 range. On the crosses, the AUD has appreciated against the EUR (+0.6%), GBP (+0.3%) and CNH (+0.4%) over the past 24hrs, but in level terms AUD/EUR and AUD/GBP continue to track around multi-year lows.

Offshore forces will continue to be the main AUD driver over the near-term. As discussed above, following the recent upswing, we believe bond yields and the USD could lose some ground over the period ahead with the European/US PMIs (6pm, 6:30pm, and 11:45pm AEST) potentially showing a softening across services sectors and/or a reduction in the US’ relative outperformance. Later this week all eyes will be on the speech by Fed Chair Powell (Saturday morning AEST). Given a ‘higher for longer’ Fed outlook now appears more adequately priced, we think a rehash of the ‘data dependent approach from here’ or that policy easing may be some time away may disappoint rates markets. This in turn could see the USD ease back, pushing the AUD higher.

Beyond the near-term gyrations, as discussed previously, although we aren’t foreseeing a strong rebound in the AUD for a while yet, down around current levels we expect the AUD to find solid support. Fundamentals including Australia’s current account surplus (now ~1.4% of GDP), the high level of the terms-of-trade, efforts by China to restrain CNY weakness, and flows related to the increasing pool of offshore investments undertaken by the superannuation industry should, in our opinion, help the AUD find a base. Indeed, data released yesterday showed that Australian superfunds now have just under A$900bn worth of offshore investments. As our chart illustrates this is up from ~A$250bn a decade ago, and on our figuring ~40% of these investments are FX hedged. Looking ahead, with the USD downtrend expected to recommence as seasonal trends become more negative (see Market Musings: History doesn’t repeat, but…), as the US’ relative outperformance fades (or at the very least the data fails to match more upbeat expectations), and/or as China injects fresh stimulus to reinvigorate its faltering recovery, we continue to forecast the AUD to grind back into the low 0.70’s by mid-2024.

AUD event radar: Eurozone PMIs (Today), Jackson Hole Symposium (Thurs-Sat), US Fed Chair Powell Speaks (Sat), AU Retail Sales (28th Aug), RBA Deputy Gov. Bullock Speaks (29th Aug), AU CPI (30th Aug), China PMIs (31st Aug), Eurozone CPI (31st Aug), US PCE Deflator (31st Aug), US Jobs (1st Sep), RBA Meeting (5th Sep), AU GDP (6th Sep), RBA Gov. Lowe Speaks (7th Sep).

AUD levels to watch (support / resistance): 0.6310, 0.6370 / 0.6547, 0.6600

SGD corner

Inline with the USD trend the consolidation in USD/SGD has continued with the pair trading in a tight range centered on ~$1.3570 so far this week. On the crosses, EUR/SGD (now ~1.4722) has dipped back under its 50-day moving average with the relatively larger falls in European long-end bond yields and further rise in gas prices weighing on the EUR (see above). By contrast, SGD/JPY (now ~107.46) remains at a historically high level.

As outlined above, focus today will be on the European/US PMIs, with developments in China and the latest Singapore CPI data also on the radar. Base effects should see annual CPI inflation in Singapore slow, with the core measure projected to fall below 4%pa for the first time since May 2022. Further ahead, market attention will be on the week ending speeches by Fed Chair Powell and ECB President Lagarde at the Jackson Hole Symposium. All up, we believe the USD (and USD/SGD) is at risk of easing back following its strong run if the data shows a softening in the services PMIs or a narrowing in the ‘growth gap’ between the US and Europe, and/or US Fed Chair Powell doesn’t deviate from his recent comments regarding the policy outlook.

SGD event radar: Singapore CPI (Today), Eurozone PMIs (Today), Jackson Hole Symposium (Thurs-Sat), US Fed Chair Powell Speaks (Sat), China PMIs (31st Aug), Eurozone CPI (31st Aug), US PCE Deflator (31st Aug), US Jobs (1st Sep).

SGD levels to watch (support / resistance): 1.3400, 1.3424 / 1.3590, 1.3690

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