• US banks. Regional bank issues remain in focus. This has dampened risk sentiment, and is supporting expectations the Fed tightening cycle is over.
• ECB hike. ECB raised rates by another 25bps. Tweaks to its guidance were viewed ‘dovish’, but we think this is a misread. President Lagarde was quite ‘hawkish’ with more rate rises expected.
• AUD holding. AUD ticked up, with a bounce in AUD/EUR supportive. US non-farm payrolls released tonight. Strong data could question the markets rate cut bets.

The re-emerging US regional banking sector concerns remain in focus. The issues continue to dampen risk sentiment, though FX markets remain rather sedate, with some modest JPY strength the only noticeable reaction. This has been offset by a slightly softer EUR post the ECB meeting (see below), with the USD Index little changed compared to this time yesterday. AUD has held up, and at ~$0.6690 has ticked up above its 50-day moving average.

In terms of the US regional banks, First Horizon in Tennessee has joined PacWest and Western Alliance in the news, with the three experiencing share price losses of ~33%, ~51% and ~39% respectively overnight as company specific and broader macro concerns unnerve investors. As we have highlighted previously, US Fed tightening cycles typically expose excesses that have been built up and/or flaws in parts of the system. We continue to expect the most abrupt tightening cycle in several decades to generate more ‘aftershocks’ and volatility (see Market Musings: Buckle up, volatility should continue). The banking sector worries dragged down overall US equity markets, with the S&P500 ending the day 0.7% lower. This is the 4th straight, albeit modest, decline in the S&P500. Bond markets experienced intra-day volatility. In the end the US 2-year yield eased a little, and at 3.79% is ~37bps below Monday’s high. The banking sector turmoil and likely tightening in lending conditions has reinforced thinking that the US Fed’s tightening cycle is over.

In Europe, as expected the ECB downshifted its pace of rate hikes to 25bps, taking the main policy rate up to 3.75%. The ~375bps of rate hikes delivered over the past ~9-months is a very fast tightening cycle by ECB standards. Overeager markets latched on to comments from the ECB that it will “continue to follow a data-dependent approach”, and forward guidance that appeared vaguer about future moves. This weighed on European yields and exerted some pressure on the EUR. However, we think markets are misreading the ECB’s resolve to win the battle on inflation. Unlike Fed Chair Powell, President Lagarde stressed many times that the ECB is not pausing and reiterated that there is still more ground to cover. As our chart shows, markets are factoring in further rate hikes by the ECB over the next few months, in contrast to many other central banks. We expect this to provide the EUR with support.

Today, in addition to the banking issues, focus will be on the US labour market report (10:30pm AEST). We think that the Fed’s shift to a more data-dependent approach should mean US rate expectations and the USD are more volatile around major releases. Reaction is likely to be uneven, in our view, with a stronger report likely to see future Fed rate cut pricing pared back and the USD strengthening by more than the reaction to a softer showing.

Global event radar: US Jobs Report (Tonight), US CPI (10th May), Bank of England Meeting (11th May), US Retail Sales (16th May), China Activity Data (16th May), Fed Chair Powell Speaks (19th May).

AUD corner

AUD has held up in the face of re-emerging US regional banking issues and a more negative risk environment. At ~$0.6690 the AUD has edged back above its 50-day moving average, with relative outperformance on some crosses like AUD/EUR and AUD/GBP counteracting the dip in US equities and industrial metal prices. AUD/EUR rebounded following the markets ‘dovish’ interpretation of the ECB’s adjustment to its guidance that accompanied its latest 25bp rate hike. Although, at ~0.6075, AUD/EUR remains below its post-RBA rate hike levels, and as our chart shows, it is still well down year-to-date.

In today’s Asian session, the RBA publishes its Statement on Monetary Policy (11:30am AEST). This is a more detailed breakdown of the RBA’s updated forecasts. However, as a snapshot was already provided in the post meeting statement, and given Governor Lowe spoke earlier this week, we doubt any substantially new information will be contained, so it is unlikely to be market moving, in our opinion.

Tonight, the focus will be on the US labour market report (10:30pm AEST). We think the US Fed’s shift to a more data-driven approach should mean that US rate expectations, the USD, and the AUD are more volatile upcoming major US data, like tonight’s’ non-farm payrolls data and next week’s CPI report. As discussed, based on where market expectations are now sitting, with Fed rate cuts factored in over H2, we believe reaction to the US labour market data could be unbalanced with a stronger report likely to generate a larger positive USD reaction as future rate cut pricing is pared back.

More generally, we remain of the view that near-term upside in the AUD should be limited, with the backdrop of ongoing market volatility, slowing global growth, and weaker commodity demand fundamental headwinds. In particular, we doubt the rebound in AUD/EUR will extend much further. We disagree with the markets knee-jerk ‘dovish’ take of the ECB’s updated guidance. President Lagarde was quite ‘hawkish’ in her views, and further ECB rate hikes are anticipated over the next few months. By contrast we think the RBA is at the end of its hiking cycle, while the step down in global growth should also weigh more on cyclical currencies like the AUD.

AUD event radar: US Jobs Report (Tonight), US CPI (10th May), Bank of England Meeting (11th May), US Retail Sales (16th May), China Activity Data (16th May), AU Wages (17th May), AU Jobs Report (18th May), Fed Chair Powell Speaks (19th May), RBNZ Meeting (24th May).

AUD levels to watch (support / resistance): 0.6525, 0.6595 / 0.6729, 0.6788

SGD corner

USD/SGD consolidated around ~$1.3280 overnight, with EUR/SGD slipping back to ~1.4630 in the wake of the ECB meeting and the markets more ‘dovish’ take on the tweaks to the meeting statement which accompanied the 25bp rate hike (see above). As outlined, we think the market is misjudging the ECB guidance. President Lagarde was quite hawkish and forceful in her views that the ECB hasn’t paused and that further hikes are needed to tame inflation. Further ECB policy tightening, in our view, should provide EUR (and EUR/SGD) with underlying support over the next few months.

Tonight, attention will be on the US labour market data. As discussed, although the Fed has adjusted its guidance to a more data-dependent approach, that does not mean that rate hikes have ended, and importantly, that rate cuts should be anticipated any time soon. We think the USD and US rate expectations could be quite volatile around upcoming data releases. Indications that the US labour market remains tight could raise doubts that the Fed may start cutting rates later this year, which in turn could give the USD (and USD/SGD) some short-term support.

SGD event radar: US Jobs Report (Tonight), US CPI (10th May), Bank of England Meeting (11th May), US Retail Sales (16th May), China Activity Data (16th May), Fed Chair Powell Speaks (19th May), Singapore CPI (23rd May).

SGD levels to watch (support / resistance): 1.3200, 1.3245 / 1.3363, 1.3420