• Risk wobbles. Renewed US/Iran tensions dampen risk sentiment. Oil prices jump, US equities dip, & USD firmer. AUD slips back.
• US data flow. Fed’s Waller ‘hawkish’. Markets pricing in a Q3 Fed rate hike. US CPI out tonight. New US Fed Chair Warsh also speaks. USD vol. likely.
Global Trends
A few renewed geopolitical and macro related wobbles across markets at the start of the new week. US equities lost altitude (S&P500 -0.8%), with the tech-sector underperforming (NASDAQ -1.6%), while US bond yields rose ~6-7bps across the curve and oil prices jumped up (Brent Crude +9.5% to ~US$83.30/brl, a high since mid-June). In FX, the USD strengthened with EUR slipping back (now ~$1.1383), USD/JPY edging higher (now ~162.47, near the top of its multi-decade range), GBP weakening (now ~$1.3349), the NZD dipping slightly after last weeks RBNZ rate hike inspired upswing (now ~$0.5751), and the AUD losing a bit of ground (now ~$0.6920).
The situation in the Middle East has deteriorated once again. The escalation of tensions between the US and Iran late last week intensified over the past few days with a wave of attacks unleashed by both sides. Overnight, President Trump posted that the US would reinstate a blockade preventing Iranian ships, or those of its customers, from travelling through the Strait of Hormuz. According to President Trump the US will become the “guardian”, and that a 20% fee is to be charged on all cargo shipped via the strait to cover safety and security costs. On rough figuring, this type of 20% levy could add ~US$16 to the cost of every barrel of oil passing via the Strait on a supertanker. As our chart below shows, shipping via the Strait of Hormuz has improved, but it remains a long way from pre-conflict levels. The latest developments could further constrain activity, which in turn may add to headwinds for global growth particularly as ~80-90% of the energy transported via the Strait of Hormuz is destined for Asia (the engine room of the world economy).
Macro wise a ‘hawkish’ speech by the Fed’s Waller compounded market jitters. According to Waller if there is another hot reading on US core inflation, the Fed will need to consider tightening policy in the near-term. He added that if core inflation were to show “several months” of lower readings then he would support keeping policy steady. The June US CPI data is released tonight (10:30pm AEST), after which new Fed Chair Warsh testifies to Congress (from 12am AEST). Markets are now pricing in ~11bps of rate hikes at the late-July Fed meeting, with an increase fully discounted by September and 2 moves factored in by March. Push-pull forces such as the drop in petrol prices and solid demand for hotels/admissions due to the World Cup make it difficult to estimate the June US CPI. But on net, we think there are slightly more risks of a higher than lower outcome for core inflation (mkt 2.8%pa). If realised, this may see markets bolster their late-July Fed rate hike bets, which in turn might give the USD more of a boost particularly considering the shaky risk environment.
Trans-Tasman Zone
The bout of market nervousness and firmer USD stemming from renewed US/Iran tensions, and ‘hawkish’ comments by Fed policymaker Waller has exerted downward pressure on the AUD. At ~$0.6920 the AUD is tracking ~1.2% from the bottom of the range occupied since late-January, with modest falls of ~0.1-0.4% also recorded against the EUR, GBP, NZD, CAD, and CNH over the past 24hrs. The NZD also eased a little but that comes after last week’s strong run generated by the RBNZ’s 25bp rate hike and expectations more will be delivered down the track. At ~$0.5751 the NZD is not far from its ~9-month average. As outlined previously, we believe the relative outperformance of the NZ economy and shift in interest rate differentials should see AUD/NZD gradually fall back over time.
Australian consumer (10:30am AEST) and business confidence (11:30am AEST) data is due today. Business confidence/conditions provide an early and broad-based read on how the Australian economy is travelling. More signs underlying momentum is struggling could reinforce expectations the RBA’s tightening cycle is closer to the end than the beginning. Markets are pricing in ~15bps of RBA rate hikes by year-end. Looking ahead, the next major local economic releases are the monthly jobs report (23rd July) and Q2 CPI (29th July).
Near-term, offshore developments are likely to be in the AUD driver’s seat. As outlined above, risk sentiment has soured, and tonight attention will be on US CPI (10:30pm AEST) and Fed Chair Warsh’s testimony (12am AEST). We believe there are higher chances of US core inflation coming in above than below consensus predictions. If realised, this could bolster expectations the US Fed might raise interest rates later this month, which may see the USD strengthen further (and the AUD & NZD fall). More broadly, the shift in relative interest rate differentials against the AUD, coupled with the slowdown in Australian growth and/or challenges faced by the Asian economy from prolonged disruptions to energy/supply-chains remain headwinds for the AUD, in our view.
