Market Briefing: US data rattles markets
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US macro. US growth & inflation concerns rattled market nerves on Friday. Equities & bond yields declined. USD a little firmer. AUD & NZD slip back.
Policy trends. RBA still looks to be on a different path to many other central banks. This can be AUD supportive on a few of the major AUD-crosses.
Event Radar. In Australia the monthly CPI indicator is due (Weds). Offshore, several US Fed members speak & the PCE deflator is released (Fri night).
Global Trends
The state of play in the US economy rattled a few market nerves on Friday. Risk sentiment soured with equities and bond yields falling after forward-looking activity and inflation data generated concerns the political backdrop is raising ‘stagflation’ risks (i.e. slower growth, higher inflation). The US S&P500 lost ~1.7% with the tech-focused NASDAQ underperforming (-2.2%). US bond yields shed ~7bps across the curve with the benchmark 10yr rate dipping to ~4.43%, the bottom of its ~2-month range, and commodities declined (WTI oil -3%, copper -1.4%).
In terms of the data, while the US manufacturing PMI ticked up a bit in February, the more economically significant services gauge tumbled into ‘contractionary’ territory for the first time since early-2023 as uncertainty about the Trump Administration’s policies weighed on orders and expectations. At the same time, consumer sentiment also fell with the University of Michigan measure touching a 15-month low as views about conditions and the outlook turned more negative. Added to that, 5-10yr ahead inflation expectations jumped up to 3.5%, the highest since 1995. Inflation expectations are monitored closely by central banks as views about future inflation can influence pricing and wage outcomes. As our chart shows, Trump 2.0 has so far generated a more volatile market environment than in late-2016/early-2017. More bursts of volatility should be anticipated over the period ahead.
In FX, the USD index recovered a little lost ground as the bout of risk aversion washed through. EUR slipped back but has reversed course this morning (now ~$1.0480) after exit polls from the weekend German elections showed that a ‘Grand Coalition’ can be agreed with the major conservative parties in the driver’s seat. GBP (now ~$1.2645) consolidated near the top of its recent range, while the JPY continue to buck the trend. Shaky risk appetite, lower global bond yields, and firmer Japanese inflation, which reinforced calls looking for more Bank of Japan rate hikes, combined to push USD/JPY down to levels last traded in early-December (now ~149.20). Given their positive correlation to cyclical growth assets the AUD (now ~$0.6368) and NZD (now ~$0.5740) weakened modestly on Friday, though on net both rose slightly last week.
Several US Fed members are due to speak this week with the US PCE deflator (the Fed’s preferred inflation measure) also due (Fri night AEDT). On balance, while the USD looks set to remain firm for a while as the various tariff and macro issues play out, we don’t think it will push above recent highs. USD sentiment/positioning is already ‘bullish’, the USD is tracking above our ‘fair value' models, and other major currencies like the JPY are appreciating. In our view, this mix means the USD remains biased to weaken over the medium-term as the Trump risk premium is unwound, much like it was during his first term.
Global event radar: US PCE (1st Mar), China PMI (1st Mar), EZ CPI (3rd Mar), ECB Meeting (7th Mar), US Jobs Report (8th Mar)
Trans-Tasman Zone
The burst of market volatility and risk aversion on Friday on the back of concerns about the US economic environment (see above) took some of the heat out of the AUD and exerted a little downward pressure on the NZD. That said, at ~$0.6368 the AUD remains near the upper end of its 2-month range, as is the NZD (now ~$0.5740). The backdrop also weighed a bit on the AUD crosses. Falls of ~0.1-0.4% were recorded against EUR, GBP, NZD, CAD, and CNH, though in level terms they are still above where they kicked off February. By contrast, AUD/JPY remains on the backfoot with the broad-based JPY revival unfolding due to the shaky risk environment and expectations about further rate rises by the Bank of Japan because of Japanese inflation pressures. At ~95 AUD/JPY is near the bottom of the range occupied since mid-September.
In Australia the monthly CPI indicator for January will be in focus this week (released Weds). This is only a partial inflation gauge, particularly the data for the start of the new quarter, as many services prices aren’t captured until month 2 or 3 of the quarter. Nevertheless, the CPI indicator can generate market and AUD volatility. We think headline and core inflation might accelerate slightly as the artificial drag from electricity subsidies reverses. The lower AUD may also flow through to higher consumption/goods import prices. Signs inflation is holding up could bolster bets that the RBA won’t be in a hurry to deliver a follow up rate cut, particularly given the resilient Australian jobs market and positive fiscal impulse coming from the state and federal governments. Markets are fully discounting the next RBA rate cut by July, with another one after that only priced in by February 2026.
We believe relative policy trends between the RBA and others should be AUD supportive against currencies like EUR, NZD, CAD, and CNH that are facing growth challenges and direct tariff risks, or where more aggressive rate cuts are anticipated. Bursts of tariff-related AUD volatility are probable over coming weeks; however we think AUD downside potential should be constrained, and that a further modest grind higher can come through over the medium-term as the USD deflates. Notably, even after its recent rebound a fair degree of negativity still looks baked into the AUD given it is tracking ~3-4 cents below our ‘fair value’ models and ‘net short’ AUD positioning (as measured by CFTC futures) is elevated.
AUD & NZD event radar: AU CPI (Weds), China PMI (1st Mar), EZ CPI (3rd Mar), AU GDP (5th Mar), ECB Meeting (7th Mar), US Jobs Report (8th Mar)
AUD levels to watch (support / resistance): 0.6290, 0.6320 / 0.6410, 0.6460
NZD levels to watch (support / resistance): 0.5670, 0.5710 / 0.5805, 0.5845
SGD Corner
In line with the broader USD trends USD/SGD (now ~1.3360) has extended its pull-back over the past week. USD/SGD is currently trading towards the bottom of its multi-month range and is below its 1-year average. Underlying pressure on the EUR has also kept EUR/SGD heavy. At ~1.40 EUR/SGD is tracking around the lower end of its multi-year range. SGD/JPY (now ~111.70) has fallen back recently due to the JPY’s upswing stemming from the bursts of volatility and expectations looking for more Bank of Japan rate hikes.
Singapore CPI inflation is due today, but we doubt it will significantly move the SGD needle. In our view, global forces remain in the driver’s seat, and as such we think USD/SGD may drift a touch lower over the near-term as more of the Trump risk premium is priced out of the USD and/or US growth risks boost US Fed rate cut expectations.
SGD levels to watch (support / resistance): 1.3270, 1.3310 / 1.3390, 1.3430
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
MONDAY (24th February) SGD CPI Inflation (Jan) (4pm) GBP BoE’s Lombardelli Speaks (8pm) EUR Germany IFO (Feb) (8pm)
TUESDAY (25th February) GBP BoE’s Ramsden Speaks (12:15am) USD Chicago Fed Index (Jan) (12:30am) USD Dallas Fed Manu. Index (Feb) (2:30am) GBP BoE’s Dhingra Speaks (5am) AUD RBA’s Jones Speaks (1:45pm) USD Fed’s Logan Speaks (8:20pm) EUR ECB Wage Indicator (9pm)
WEDNESDAY (26th February) EUR ECB’s Schnabel Speaks (12am) GBP BoE’s Pill Speaks (1am) USD House Prices (Dec) (1am) USD Consumer Confidence (Feb) (2am) USD Richmond Fed Index (Feb) (2am) USD Fed’s Barr Speaks (3:45am) USD Fed’s Barkin Speaks (5am) AUD CPI Inflation – Monthly (Jan) (11:30am) AUD Construction Work (Q4) (11:30am)
THURSDAY (27th February) GBP BoE’s Dhingra Speaks (3:30am) USD Fed’s Bostic Speaks (4am) AUD RBA’s Plumb Speaks (8am) NZD ANZ Business Confidence (Feb) (11am) AUD CAPEX (Q4) (11:30am) EUR Spain CPI Inflation (Feb P) (7pm) EUR ECB Meeting Minutes (11:30pm)
FRIDAY (28th February) USD Durable Goods Orders (Jan P) (12:30am) USD Initial Jobless Claims (12:30am) USD Fed's Schmid Speaks (1:15am) USD Fed’s Hammack Speaks (5:15am) USD Fed’s Harker Speaks (7:15am) NZD Consumer Confidence (Feb) (8am) NZD Filled Jobs (Jan) (8:30am) JPY Tokyo CPI Inflation (Feb) (10:30am) JPY Industrial Production (Jan P) (10:50am) GBP BoE’s Ramsden Speaks (6pm) EUR France CPI Inflation (Feb P) (6:45pm)
SATURDAY (1st March) EUR Germany CPI Inflation (Feb P) (12am) CAD GDP (Q4) (12:30am) USD PCE Deflator (Jan) (12:30am) USD Trade Balance (Jan) (12:30am) USD Chicago PMI (Feb) (1:45am) CNY PMIs (Feb) (12:30pm)
*Note, all times/dates provided are AEDT
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