• Market wobbles. Jump in oil & ‘hawkish’ vibes from US Fed rattled investors. USD firmer. AUD & NZD lost ground. AUD underperforms on crosses.
• AU CPI. Inflation accelerates, but not as much as expected. However it is too high & RBA should respond. More hikes priced. Growth set to slow.
Global Trends
A few renewed wobbles across markets overnight as a mix of factors rattled nerves. European equities lost ground (EuroStoxx600 -0.6%) and the major US indices tread water, while bond yields rose with US rates climbing ~8-11bps across the curve. Elsewhere, the USD edged up with EUR (now ~$1.1675) and GBP (now ~$1.3474) slipping back and USD/JPY edging over ~160. Cyclical currencies like the NZD (now ~$0.5829) and AUD (now ~$0.7115) underperformed with both shedding ~1%. Oil prices jumped with brent crude climbing ~9.5% to be up around US$118/brl, not that far from its recent conflict peak.
On the one hand, signs the Strait of Hormuz could remain closed for an extended period unnerved participants. It was reported President Trump instructed aides to prepare for an extended blockade of Iran which may remain until a deal is secured that addresses the nation’s nuclear programme. As we have mentioned previously, the situation in Middle East is fluid and bursts of volatility should be anticipated for a while yet. Moreover, the events 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. On top of Middle East events there were a few ‘hawkish’ vibes from the US Fed at this morning’s meeting, the last with Chair Powell at the helm (though he did note he will remain a board member). As expected, the Fed kept interest rates on hold at 3.5-3.75%, and while President Trump’s appointee Miran voted in favour of a cut, 3 other members dissented the decision to include an easing bias in the meeting statement. At the press conference Chair Powell stressed there was a vigorous discussion about policy guidance and, when probed, indicated the wording might be changed at the next meeting given how the economy/inflation pulse is evolving. Markets are factoring in only a ~19% chance of a US Fed rate cut by January 2027, a long way from the ~75bps of reductions discounted by this point before the US/Iran conflict kicked off.
Looking ahead, in addition to US/Iran news, markets will also be focused on the China PMIs (11:30am AEST), Eurozone GDP/CPI inflation (7pm AEST), the Bank of England (9pm AEST) and ECB decisions (10:15pm AEST), and US Q1 GDP (10:30pm AEST). On balance, we think a mechanical reacceleration in US GDP growth after last quarters drag on activity from the prolonged government shutdown unwinds, coupled with the ‘hawkish’ rhetoric from the US Fed and shaky risk sentiment, could help the USD recoup more lost ground over the period ahead.
Trans-Tasman Zone
The modest burst of risk aversion stemming from the jump in oil prices on the unwelcomed reports about the reopening of the Strait of Hormuz, and upward repricing in US interest rate expectations on the back of ‘hawkish’ US Fed vibes has exerted downward pressure on the NZD and AUD (see above). At ~$0.5829 the NZD is back near its 1-year average, while the AUD (now ~$0.7115) is at the lower end of its 2-week range. The AUD also underperformed on the crosses with falls of ~0.4-0.9% recorded against EUR, JPY, GBP, CAD, and CNH over the past 24hrs.
In addition to the global developments, yesterday the March/Q1 Australian CPI data was released. Inflation isn’t running where it needs to be, however the figures were a touch softer than consensus predicted. Headline inflation jumped from 3.7%pa to 4.6%pa in March, and the quarterly trimmed mean (the underlying series policymakers are focused on) is 3.5%pa. That said, some of the surge in inflation due to higher petrol prices has yet to flow through, neither have the potential second round effects on areas such as travel, logistics, construction etc. The starting point is unfavourable, and as our tracker shows the Australian inflation pulse will get worse before it gets better. In our view, this points to the RBA having to tighten policy further over coming months with a move on 5 May more likely than not. Markets agree with a hike in May assigned a ~76% chance and ~68bps of rate rises discounted by December.
Given the push/pull domestic and global forces at work we expect more bursts of AUD volatility over the period ahead. On net, we believe the strong inflation/rising RBA interest rate narrative is a ‘known known’ and largely baked into the AUD. However, we don’t feel the looming growth hit from petrol prices and interest rates has been accounted for. Neither have the global growth headwinds generated by the Middle East conflict and spillover effects on supply-chains, particularly on activity across Asia. This backdrop, combined with the upswing in US interest rates and higher oil prices (given the US’ shift to becoming a ‘net energy exporter’) could weigh on the AUD, especially as it is tracking ~1.5-2.0% above our ‘fair value’ estimates and positioning (as measured by CFTC futures) is ‘net long’.
