• Upbeat tone. Tech stocks recovered more ground. Bond yields tread water. NZD consolidated while AUD ticked up & outperformed on the crosses.
• Data flow. AU Q3 CPI due today & RBNZ expected to hike. US Fed meets tomorrow morning. UK Budget tonight. Bursts of FX volatility possible.
Global Trends
Risk sentiment remained positive overnight. Tech stocks extended their recovery ahead of key earnings announcements from several megacap stocks (NASDAQ +1.2%). Focus for investors will be on the outlook/level of AI-related spending and when/if the investment might pay off down the track. Elsewhere, oil prices eased a little (brent crude -0.8%) on reports of some renewed efforts to de-escalate tensions in the Middle East. That said, at ~US$114.24/brl brent crude remains elevated, and the spillovers into products such as diesel and jet fuel remains a headwind for global consumers and businesses.
Bond yields consolidated ahead of several central bank meetings that are on the calendar, including todays RBNZ decision (12pm AEDT) and tomorrow’s US Fed announcement (Thurs 5am AEDT). In FX, the USD index ticked up on the back of renewed strength versus the EUR (now ~$1.1127), GBP (now ~$1.3308), and JPY (now ~157.92). The NZD tread water (now ~$0.5681), while the AUD outperformed (now ~$0.7026) with the Q3 Australian CPI report in focus today (11:30am AEDT).
In the US, the second tier economic data was generally better than anticipated. Durable goods orders (a proxy for business investment) rose in September, with the parts that feed into US GDP solid. Consumer confidence also rose in October, albeit from depressed levels, while the pullback in new home sales was less than predicted. As mentioned, the US Fed meets tomorrow. Markets are assigning a less than 10% chance of a rate hike at this meeting, although an increase is ~90% priced in for the next gathering in December, with ~3 hikes anticipated by next September. This isn’t a forecasting round, so no new macro/interest rate projections will be provided. On net, as positioning (as measured by CFTC futures) is ‘net long’, and with it tracking a little above our ‘fair value’ model, we think the USD might drift back into the end of the month (barring a sustained deterioration in risk sentiment) if Fed Chair Warsh refrains from providing strong guidance about the path ahead and/or the upcoming top tier US data isn’t as strong as assumed (Q3 US GDP is due on Thursday night AEDT).
Trans-Tasman Zone
The upbeat tone in markets, as illustrated by another lift in US equities overnight and uptick in copper prices (+1.8%), helped the NZD and AUD hold their ground against a firmer USD (see above). Upcoming NZ, Australian, and US economic events suggest NZD and AUD volatility might pick up over the next few sessions.
At ~$0.5681 the NZD remains near the upper end of its ~1-month range with today’s RBNZ meeting (12pm AEDT) and upcoming NZ General Election (7 November) on the radar in NZ. Given domestic and global inflation pressures we expect the RBNZ to raise rates again today, and keep the door open to do more given settings are still in ‘accommodative’ territory. However, as is often the case with the NZD around RBNZ meetings, there is a chance the decision isn’t deemed to be ‘hawkish’ enough and the currency weakens after the event. Markets are pricing in a ~94% chance the RBNZ raises rates today, with 4 hikes by next June factored in. But beyond some potential near-term volatility, we remain of the opinion that the mix of sturdy/improving NZ growth, elevated agricultural prices, and outlook for a stream of further RBNZ rate rises could see NZD/USD grind up (and AUD/NZD lose altitude) over the medium-term.
Closer to home, the AUD edged up (now ~$0.7026) and outperformed on the major cross-rates with gains of ~0.4-0.6% recorded against EUR, JPY, GBP and CAD the past 24hrs. Attention today is on Q3 Australian CPI (11:30am AEDT). Consensus is looking for core inflation to rise ~1%qoq in Q3, while the RBA’s (now stale looking) projections have a ~0.85%qoq increase penciled in. Confirmation inflation remains uncomfortably high and well above the RBA’s target could see markets factor in greater odds of further RBA action by year-end. Markets are assigning a ~60% chance of another RBA hike on 3 November, about a 80% probability it occurs by the 8 December meeting, and a full rate rise by February. It looks to be a matter of when, not if the RBA tightens policy further. The RBA faces hard choices given high/sticky inflation and signs growth is slowing/unemployment is rising. In our opinion, inflation is the main game in town and slower growth/higher unemployment is the price that needs to be paid to get things on track.
There will be swings along the way, but we think a further lift in near-term RBA rate expectations might give the AUD more of a boost over the period ahead, especially as positioning metrics indicate participants remain ‘bearish’/’net short’ the AUD, based on our thinking the USD could slip back (see above), and as November-December has historically been a ‘seasonally’ positive time of the year for the AUD.
