Market Briefing:USD losing altitude
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Softer USD. Firmer JPY & positive rhetoric about a possible US-China trade deal weigh on the USD. AUD & NZD up at pre-Christmas levels.
US consumer. Update from Walmart raised concerns about the health of the US consumer. Household spending is the engine room of the US economy.
AU jobs. Another positive jobs report. Employment stronger than expected. Data supports the RBA's 'hawkish' guidance about future rate cuts.
Global Trends
Economic data didn’t move the needle overnight, rather concerns about the health of the US consumer via an update from bellwether stock Walmart and hopes of a trade deal between the US and China were the market driving force. Walmart, the first of the large retailers to report results after the holiday season, noted there are “uncertainties” about US consumer behaviour with wallets still “stretched” due to the ongoing cost of living squeeze, and the broader environment given the geopolitical backdrop. The consumer is the engine room of the US economy (household spending is ~3/4’s of GDP), so the comments raised a few eyebrows, particularly as Walmart is also the type of retailer that typically does well in tougher economic times. Consumer stocks underperformed with the US S&P500 (-0.5%) retreating from record highs. Bond yields also slipped back with the benchmark US 10yr rate falling ~3bps (now ~4.50%). Markets are factoring in a little more policy easing by the US Fed this year. The next US Fed rate cut is fully discounted by September.
On the tariff-front, off-the-cuff remarks yesterday by President Trump that a deal with China is “possible” generated a few FX market swings. The USD index has extended its pull-back with the more positive vibes supporting CNH. At ~7.2355 USD/CNH is around its lowest since late-November. The interest rate sensitive USD/JPY also declined. The ~1.2% drop in USD/JPY over the past 24hrs puts it down at ~149.70, a ~2-month low. Japanese CPI is released today (10:30am AEDT). A further pickup in Japanese inflation is anticipated, which if realised should reinforce expectations the Bank of Japan could raise interest rates a few more times this year. Elsewhere, EUR is tracking close to ~$1.05, GBP is near ~$1.2668, USD/SGD (now ~1.3330) is at a multi-month low, while the NZD (now ~$0.5762) and AUD (now ~$0.6401) are up at levels last traded in mid-December.
As we have outlined the past few weeks, what's important for markets isn’t if something is ‘good’ or ‘bad’ but rather if it is ‘better’ or ‘worse’ than what’s baked in. In the wake of the November US election, as they did in late-2016, markets aggressively factored in the Trump policy agenda into the USD. However, so far, the reality has underwhelmed with tariff policies not being implemented as quickly (or as harshly) as prior rhetoric suggested they would be. As our chart shows, the USD continues to track a similar path to the period after the 2016 Trump win. There will be more headline-driven bumps along the way, but on net, we think the USD is biased to unwind more of its Trump risk premium. Signs in today’s global PMI data (Eurozone 8pm AEDT, US 1:45am AEDT) that the US’ economic outperformance is waning might also drag on the USD, in our view.
Global event radar: Global PMIs (Tonight), 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 weaker USD, stemming from a firmer JPY and positive vibes about a possible trade deal between the US and China (see above) have helped the AUD (now ~$0.6401) and NZD (now ~$0.5762) perk up. The AUD and NZD are at levels last traded in mid-December, with the AUD over 5% from its February low. The AUD has also edged up on a few crosses with gains of ~0.2-0.4% recorded against the EUR, GBP, CAD, and CNH over the past 24hrs. AUD/EUR (now ~0.6098) is near a ~2-month high and above its ~1-year average. AUD/JPY remains an exception with the prospect of more Bank of Japan rate hikes in a world where other central banks are easing policy supporting the JPY (now ~95.84).
The local economic data has also given the AUD a helping hand. The January jobs report released yesterday showed the labour market remains on solid footing. Employment was strong (+44,000, more than double consensus forecasts), with full-time leading the way (+54,100). The participation rate rose to a record high (now ~67.3%), and this increase in labour supply was a partial factor which saw the unemployment rate nudge up to 4.1%. The ABS also noted that “some of the increase in unemployment reflected more people than usual with jobs in January who were waiting to start or return to work”. This has been a new seasonal phenomenon that has occurred the past few summers, and points to another robust jobs report next month as this pool of people starts work (red bars in chart below).
While growth momentum has slowed the economy continues to operate at a high level of activity. This is particularly the case across the public sector and the labour-intensive services industries. The latest jobs data supports the RBA’s ‘hawkish’ rhetoric about the prospect of further rate cuts. The RBA, which didn’t hike as aggressively as others, looks set to take a similar slow/gradual approach on the way down. The RBA Governor testifies to the Parliamentary Economics Committee today (from 9:30am AEDT). 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 volatility are likely over coming weeks, however we believe the AUD is likely to edge gradually higher over the medium-term. Notably, even after its recent recovery a fair degree of negativity still looks priced into the AUD given it is tracking ~3 cents below our ‘fair value’ models and ‘net short’ AUD positioning (as measured by CFTC futures) is elevated.
AUD & NZD event radar: RBA Gov. Bullock Speaks (Today), Global PMIs (Tonight), 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): 0.6310, 0.6370 / 0.6420, 0.6460
NZD levels to watch (support / resistance): 0.5680, 0.5720 / 0.5805, 0.5845
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
FRIDAY (21st February) USD Fed’s Kugler Speaks (9am) AUD RBA Governor Bullock Speaks (9:30am) JPY CPI Inflation (Jan) (10:30am) GBP Retail Sales (Jan) (6pm) EUR France PMIs (Feb P) (7:15pm) EUR Germany PMIs (Feb P) (7:30pm) EUR PMIs (Feb P) (8pm) GBP PMIs (Feb P) (8:30pm)
SATURDAY (22nd February) CAD Retail Sales (Dec) (12:30am) EUR ECB’s Lane Speaks (1:30am) USD PMIs (Feb P) (1:45am) USD Fed’s Jefferson Speaks (3:30am) CAD BoC Governor Macklem Speaks (4:45am)
*Note, all times/dates provided are AEDT
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