• Positive vibes. Equities rose & the USD slipped back as markets tempered near-term US Fed rate hike bets & USD/JPY fell. AUD at top of recent range.
• Data pulse. Post Q2 AU GDP markets factoring in another RBA hike by November. High chance it happens this month. US jobs report out tonight.
Global Trends
Risk sentiment has been positive over the past couple of sessions with oil prices stabilising (albeit at elevated levels with brent crude tracking near ~US$96/brl) and traders paring back expectations for near-term US Fed rate hikes. Odds of a mid-September rate rise by the US Fed have eased towards a 50/50 bet (down from ~75% earlier in the week), although at the same time medium-term views haven’t meaningfully adjusted with ~53bps of tightening still factored in by next April. A balanced tone by the Fed’s Waller overnight when discussing the outlook was a catalyst for the near-term rethink. According to Waller he is “willing to support holding the policy rate at its current level” if the inflation downtrend continues, yet he also stressed his vote in September “will be heavily influenced by what we learn about August inflation”, due next week, and “if inflation comes in hot, I would consider a rate hike”.
The modest falls in US bond yields (rates shed ~1-3bps across the curve) supported equities with the tech-focused NASDAQ (+1.4%) outperforming the S&P500 (+1.1%). Base metals like copper (+0.9%) rose, as did precious metals (gold +1.9% to US$4521/ounce). In FX, the USD lost ground with the undervalued JPY coming back to life over recent days. At ~155.84 USD/JPY is ~2.7% lower from where it opened the week. Some reports of ‘rate checks’, a warning shot and possible precursor to more FX intervention have been compounded by ‘hawkish’ rhetoric by the BoJ’s Takata who stated that “back-to-back rate hikes would be a possibility”. Markets are now assuming a 98% chance of a BoJ rate increase in mid-September with over 3 moves discounted by mid-2027. As indicated previously, given USD/JPY is the second most traded currency it influences broader USD trends, and our long-standing thoughts that the JPY should claw back lost ground is a reason why we think the USD may gradually weaken over the longer-run. Elsewhere, the EUR appreciated (now ~$1.1627), as has GBP (now ~$1.3526). NZD (now ~$0.5882) has rebounded from its post RBNZ meeting dip, where the latest 25bp rate rise and forecasts for more to come, failed to exceed the markets uber bullish views. The backdrop, and heightened expectations the RBA could move rates up again in late-September (now ~64% priced in) following the Q2 Australian GDP report has helped push the AUD to the top of the range occupied since mid-May (now ~$0.7201).
Tonight, focus will be on the monthly US jobs report (10:30pm AEST). Markets continue to react in a binary fashion to the US data, with stronger prints bolstering views the US Fed might lift rates the next few months and weaker prints tempering traders thoughts. On balance, we believe there are some upside risks to consensus predictions for the US jobs data. If realised, we believe the USD could bounce back into the end of the week.
Trans-Tasman Zone
The more upbeat vibes across risk markets stemming from the moderation in near-term US Fed rate hike predictions and stabilization in oil, coupled with the drop in USD/JPY has dragged on the USD (see above). This in turn has supported the NZD and AUD. At ~$0.5882 the NZD has rebounded back above its 1-year average and recouped the bulk of the knee-jerk dip that came through post this weeks RBNZ meeting when the 25bp rate hike and projections showing more to come failed to exceed very ‘hawkish’ pre-event thinking. As outlined before, in our opinion, the combination of improving NZ growth, rising NZ interest rates, and elevated agricultural prices (due to El nino) could be supportive factors for the NZD over the medium-term, especially as the NZD appears undervalued on our models (we estimate that fair value is currently closer to ~$0.60-0.61).
The backdrop, in conjunction with expectations the RBA might lift interest rates again in late-September following the solid but not spectacular Q2 Australian GDP report has also boosted the AUD (now ~$0.7201, the top of its multi-month range). For policymakers, levels of activity are more important than growth rates as they influence inflation. Demand and supply are still out of balance, and this keeps the prospect of another RBA hike, which would push policy settings further into ‘restrictive’ territory, in play. Traders see a RBA move in late-September as a ~64% chance with a rate rise fully factored in by the 3 November meeting and ~39bps of tightening discounted by mid-2027. In our view, it looks to be a matter of when, not if, the RBA acts again given lingering/sticky inflation pressures across the economy. That said, timing wise, a move in late-September is far from locked in as the monthly Australian CPI is released the day after the RBA meeting and policymakers may want to see if the last inflation print was a rouge number.
Irrespective, whether the RBA tinkers a little more with rates isn’t really a major driver for the AUD given what is baked into the yield curve. The sharp rethink in the outlook (from rate cuts to rate hikes) was important at the turn of the year, but FX is a relative price, and arguably other central banks have more to run in their cycles compared to what the RBA might deliver from here. Moreover, markets have yet to contemplate the greater domestic economic pain even higher interest rates may inflict down the track in Australia. These factors, combined with issues in the global economy, could limit the AUD’s medium-term upside potential from current lofty heights, in our view.
