• Risk wobbles. US/European equities slipped back overnight. USD firmer. NZD treading water while AUD underperforms. AUD still tracking sub ~$0.69.
• Data trends. On net, more solid US data released the past few days. Monthly US jobs report released tonight. Fed rate hike pricing could shift again.
Global Trends
After a positive end to Q2 there were a few modest wobbles across markets overnight. European and US equities slipped back with the tech-focused NASDAQ (-0.7%) underperforming the broader S&P500 (-0.2%). Long-end bond yields ticked up a fraction with the US 10yr rate tracking near ~4.48%, a little above the midpoint of its ~3-month range. Across commodities, WTI crude oil dipped (-2.9%), as did copper (-1.5%), while iron ore (+1%) and gold (+0.5%) nudged up. That said, gold has fallen a long way over recent months with the current price (~US$4045/ounce) ~28% from its late-January peak. In FX, the USD index rose with EUR (the major USD alternative) losing ground (now ~$1.1379, near the bottom of its 1-year range) and USD/JPY consolidating close to its multi-decade peak (now ~162.55). Closer to home, NZD tread water just above its year-to-date lows (now ~$0.5672) and the AUD underperformed (now ~$0.6893).
Macro wise, more solid, although not spectacular, US economic data has come out in the past few days. Consumer confidence remained below average in June, yet JOLTS job openings improved (a sign of increased labour demand) and the ‘layoff rate’ remained low. This was backed up by a reduction in the Challenger Job Cuts series. The manufacturing ISM moderated over the month but remained in ‘expansionary’ territory with ‘new orders’ at healthy levels and ‘hiring intentions’ improving. When speaking at the annual ECB conference new US Fed Chair Warsh reiterated that policymakers are committed to bringing inflation to its 2.0%pa target, however inflation expectations and risks “have come down” since the last meeting suggesting time is on the Fed’s side. As our chart shows, the market is factoring in a Fed rate rise by the late-October meeting, and ~45bps of tightening by next April, with only a ~30% chance assigned to the Fed moving this month.
Given the upcoming US Independence Day holiday, the monthly jobs report has been brought forward to tonight (10:30pm AEST). After a strong showing in May, which in part looks to have been driven by hiring across service sectors plugged into the FIFA World Cup, analysts are forecasting US jobs growth to moderate (mkt +113,000) and for the unemployment rate to hold steady at 4.3%. Given the pickup in momentum across the US economy in H1 we think the risks are tilted to jobs growth coming in stronger than the downbeat predictions. If realised, this could be USD supportive as it might trigger a further upward repricing in US interest rate expectations.
Trans-Tasman Zone
The shaky risk environment over the past 24hrs, as illustrated by the modest falls in US/European equities, and firmer USD has held back the NZD, while the AUD has underperformed (see above). At ~$0.5672 the NZD is just above its recently touched year-to-date lows, and the AUD (now ~$0.6893) remains near the bottom end of the range it has occupied since late-January (~5.2% below its early-May cyclical peak). The AUD has also lost ground on the major cross-rates with falls of ~0.2-0.5% recorded against JPY, GBP, NZD, CAD, and CNH.
The monthly US jobs report is the next major (scheduled) focal point (10:30pm AEST). As indicated above, we believe the US data may come in a bit better than the conservative-looking consensus forecasts. If that ends up being the case, we think a resultant upward repricing in US interest rate expectations could exert more downward pressure on the AUD over the near-term.
As discussed before, given the slowdown in Australian growth and cracks appearing in the local jobs market, traders are only assigning a ~50% chance of another RBA rate hike this cycle. The RBA appears closer to the end than the start of its tightening phase. By contrast, other central banks have only just started to kick things off, and markets are pricing in a greater chance the US Fed raises interest rates over coming months. Relative yield spreads have shifted against the AUD, and as our chart illustrates, this might have a little bit more to run. Moreover, the swing in relative interest rate expectations could be compounded by the stepdown in Australian growth and/or challenges faced by the Asian economy from the prolonged Middle East conflict and disruptions to energy/supply-chains. Overall, we think the AUD is still facing more downside risks over the short-term with our models indicating ‘fair value’ is currently close to ~$0.68.
