• Partial bounce. Various ‘Trump trades’ backpedaled overnight with US yields & the USD a little lower & equities higher. AUD & NZD benefited.
• RBA trends. Latest research from the RBA shows monetary policy is just as potent here as elsewhere. But the RBA didn’t raise rates as high.
• AUD impulses. Higher for longer RBA should be AUD supportive against EUR, NZD, CAD, & CNH. This can help counteract positive USD vibes.
The post US-election ‘Trump trades’ paused for breath with many of the underlying assets backpedaling a little at the start of the new week. There was no major news to shift the dial, rather, as we outlined yesterday, given the signs of exhaustion following the sharp adjustments that had unfolded some retracement was probable. In terms of the numbers, US equities ticked up after last week’s negative run. The S&P500 rose 0.4% with the tech-focused NASDAQ outperforming (+0.6%). In contrast to the modest uptick in European yields, after experiencing a bit of intra-session volatility US yields ended the day slightly lower with rates down ~2bps across the curve. That said, at ~4.42% the benchmark US 10yr is still tracking towards the upper end of its multi-month range.
Across commodities, oil prices increased (WTI crude +3.3% to ~$69.20/brl), as did base metals (copper +1.5%, iron ore +3.6%). The oil price lift is being partly put down to heightened geopolitical risks following the US’ decision to green light the use of long-range missiles by Ukraine inside of Russia, although the upbeat tone in other asset markets suggests concerns aren’t really ratcheting up broadly. In FX, the USD drifted lower with the rebound in the EUR (+0.6% to ~$1.0594) and GBP (+0.4% to ~$1.2677) more than offsetting renewed JPY weakness after traders were left underwhelmed by BoJ Governor Ueda’s comments which failed to match ‘hawkish’ expectations about near-term rate hikes. The NZD (now ~$0.5891) and AUD (now ~$0.6505) benefited from the positive risk sentiment with both ~0.6% above where they were tracking this time yesterday.
It is another quiet day on the global economic release front, with appearances by ECB members, the US Fed’s Schmid (Weds 5:10am AEDT), and BoE policymakers (9pm AEDT), as well as Canadian CPI inflation (12:30am AEDT) scheduled. The Eurozone’s economic struggles, downside risks stemming from US trade-tariffs, and decelerating inflation has seen markets factor in a steady stream of additional ECB rate cuts over the next year (see chart below). The diverging outlook between the ECB and US Fed, as well as other major central banks, should act as a medium-term EUR headwind, in our view. Over time, given it is the major USD alternative, this would also help support the USD which we believe is also set to benefit and stay ‘stronger for longer’ because of the growth/inflation and interest rate spillovers generated by the Trump policy mix (see Market Musings: Trump 2.0 & the AUD).
AUD Corner
After a challenging time the AUD picked itself up from the canvas overnight with the softer USD and upbeat risk sentiment supportive (see above). That said, if you take a step back from the intra-day swings, at ~$0.6505 the AUD is still hovering towards the lower end of its multi-month range. The AUD’s relative strength on the crosses was also a factor with the backdrop helping it tick up by ~0.1-0.5% against GBP, NZD, CAD, and CNH over the past 24hrs. AUD/JPY rose ~0.9% to be back above ~100, though the renewed JPY weakness only partially counteracted Friday’s moves.
Locally, the minutes of the last RBA meeting are due today (11:30am AEDT). Given the post meeting press conference and already released forecast update the minutes shouldn’t provide much new information. Indeed, we think a speech last night by RBA Assistant Governor Kent was more noteworthy. According to Kent, the RBA’s latest modelling finds that even though there is a higher share of variable mortgage debt in Australia the “effect of monetary policy is neither faster nor more potent in Australia than elsewhere”. This is inline with our assessment that the RBA, which increased rates by ~1% less than overseas peers such as the RBNZ, BoC, BoE, and US Fed, didn’t tighten policy enough. This was partly by design as the RBA is also looking to preserve as many of the COVID-era job gains as possible. But it also means the current level of rates will need to be maintained for longer to generate the desired economic impacts. Because of Australia’s resilient labour market, stickier core inflation, elevated aggregate demand stemming from the population surge, and fiscal support we remain of the view that the start of a limited/gradual RBA easing cycle is a story for late-H1 2025.
Over time we think the diverging policy trends between the RBA and other central banks should help the AUD outperform EUR, CAD, NZD, CNH, and to a lesser extent GBP. This can offset the drag created by further modest USD appreciation, which we believe is likely over coming months as the Trump policy agenda of combative trade tariffs, greater fiscal spending, and steps to curb US immigration are factored in. In our opinion, this should constrain the AUD’s medium-term upside (i.e. we now see the AUD tracking in the mid-$0.60s over the next year) (see Market Musings: Trump 2.0 & the AUD). However, in addition to relative outperformance on the crosses, there are also other offsets against becoming overly bearish the AUD at already low levels. A decent amount of negativity already looks discounted given the AUD is trading ~4 cents under our ‘fair value’ estimate. And statistically, as we have often highlighted, over the past decade the AUD has not sustainably traded much below where it is (it has only been sub-$0.65 6% of the time since 2015) thanks to the higher terms of trade and improvement in Australia’s trade/current account position.
