Market Briefing: USD on the backfoot
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US macro. Weak US retail sales weighed on bond yields & the USD on Friday. AUD & NZD extend respective rebounds. US holiday today.
Central banks. Markets expecting another 50bp RBNZ rate cut with a 25bp move by the RBA anticipated. Have easing cycles already been priced in?
Event Radar. In addition to the RBA (Tues) & RBNZ (Weds), AU jobs report also due (Thurs). Global PMIs scheduled (Fri). US Fed members speaking.
Global Trends
US economic data was the market driver on Friday night with no fresh geopolitical or tariff-related headlines coming through which moved the dial. US retail sales undershot consensus forecasts by a fair margin, and given consumer spending is the engine room of the economy (~3/4’s of US GDP) the result dragged on US interest rate expectations and the USD. US retail sales declined 0.9% in January, the biggest monthly fall in nearly 2 years. The retail sales ‘control group’, which feeds directly into US GDP, also tumbled (-0.8%, the largest drop since March 2023). Severe winter weather in parts of the US and the devastating California fires were partly to blame, though other factors such as less front running of purchases ahead of looming tariffs and an ongoing squeeze of households budgets from high borrowing costs were also at play.
The lackluster start to the new year by the US consumer saw markets bring forward the timing of the next anticipated US Fed rate cut. Another move is now discounted by September, with an ~80% chance assigned to it happening by July. As late as last Wednesday, in the wake of the US CPI inflation report, markets had toyed with the idea the US Fed may not deliver another rate cut this year. The shift in US Fed assumptions saw US bond yields shed ~5bps across the curve with the benchmark 10yr rate (now ~4.48%) hovering near its 3-month average. In FX, the combination of the downshift in US bond yields and ongoing reaction to the delayed start to the US’ still vague ‘reciprocal tariff’ proposal exerted downward pressure on the USD. EUR (now ~$1.0485) is tracking around the top of its ~1-month range, GBP (now ~$1.2584) is where it last traded in mid-December, and the interest rate sensitive USD/JPY (now ~152.34) is within striking distance of its year-to-date lows. Elsewhere, ahead of this week’s RBNZ and RBA decisions, where rate cuts are expected by both, NZD (now ~$0.5720) and AUD (now ~$0.6354) strengthened.
In the US and Europe the latest business PMIs (Fri night AEDT) are the macro focal points this week. There are also several US Fed policymakers due to speak over coming days. In our view, signs in the PMIs that the US’ relative economic outperformance is waning may generate more USD headwinds. Although cautious comments about future US Fed rate cuts could work in the opposite direction. That said, on balance, we think the USD is biased to unwind more of its Trump risk premium over the period ahead. As our chart shows, the USD continues to track a similar pattern to the period after the 2016 Trump victory. And much like back then, traders look to have too quickly/aggressively factored in the Trump policy agenda into the USD only to be disappointed by the reality not being the same as the rhetoric.
Global event radar: RBA Meeting (Tues), RBNZ Meeting (Weds), Global PMIs (Fri/Sat), 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 softer USD on the back of partial paring back of the Trump tariff risk premium and step down in US yields following the contraction in US retail sales has helped the AUD and NZD push higher. At ~$0.6354 the AUD is back where it was trading in mid-December, over 4% above its early-February low, with the NZD up around a 2-month high (now ~$0.5720). The backdrop has also given the AUD a helping hand on most of the major crosses with gains of ~0.3-0.5% recorded against the EUR, JPY, GBP, CAD, and CNH. AUD/EUR is hovering just under its 1-year average, while AUD/NZD is tracking close to ~1.11 in what could be a volatile week for the cross-rate based on the economic calendar.
Central banks will be in focus on both sides of the Tasman this week with the RBA (Tues) and RBNZ (Weds) meeting for the first time this year. In terms of the RBA, improving inflation trends have boosted expectations that interest rate ‘relief’ will be announced. Markets are assigning a ~90% chance of a 25bp RBA rate cut on Tuesday. We feel a rate reduction is more likely than not given the broader economic landscape, though we believe odds of it happening aren’t as high as what markets are penciling in due to the resilience in the labour market, fiscal spending, and lingering inflation risks. Based on these factors we think that if the RBA crystalises market rate cut expectations it is unlikely to pre-commit to further action but rather it could stress the ‘recalibration’ lower in rates will be contingent on how the economy evolves. As outlined before, in our judgement, this looks set to be a modest and drawn-out RBA easing cycle, not a quick-fire and aggressive lowering of interest rates. This type of cautious messaging accompanying a 25bp RBA rate cut might see the undervalued AUD (which is still tracking ~4 cents below our ‘fair value’ models) edge higher. Indeed, in terms of possible short-term reactions, the largest move would likely be generated by a surprise ‘on hold’ RBA decision. RBA surprises have happened before. Based on our modelling, an unwinding of the ~22bps of cuts priced in for Tuesday’s meeting could see the AUD spike ~1%.
In NZ, based on RBNZ signals and run of economic news markets are discounting a ~95% chance of another 50bp cut being announced. If delivered, this would be the third-consecutive 50bp cut and would lower the RBNZ cash rate to 3.75%. After such an abrupt drop in the level of rates, we wouldn’t be surprised the RBNZ indicates futures moves will be at a more measured pace. The downshift in NZ interest rates should be a headwind for the NZD over the medium-term, in our view. But based on an assumption the USD remains on the backfoot near-term and prospect of the RBNZ not being more ‘dovish’ than what is already baked in we think the NZD could extend its recovery.
AUD & NZD event radar: RBA Meeting (Tues), RBNZ Meeting (Weds), RBA Gov. Bullock Speaks (Fri), Global PMIs (Fri/Sat), 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): 0.6260, 0.6310 / 0.6370, 0.6410
NZD levels to watch (support / resistance): 0.5610, 0.5670 / 0.5760, 0.5810
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events
MONDAY (17th February) JPY GDP (Q4 P) (10:50am) EUR ECB’s Nagel Speaks (10pm)
TUESDAY (18th February) USD Fed’s Harker Speaks (1:30am) USD Fed’s Bowman Speaks (2:20am) USD Fed’s Waller Speaks (10am) AUD RBA Decision (2:30pm) AUD RBA Governor Bullock Speaks (3:30pm) GBP Jobs Report (Dec/Jan) (6pm) EUR ECB’s Holzmann Speaks (8pm) GBP BoE Governor Bailey Speaks (8:30pm) EUR Germany ZEW Survey (Feb) (9pm)
WEDNESDAY (19th February) CAD CPI Inflation (Jan) (12:30am) EUR ECB’s Cipollone Speaks (1am) USD NAHB Housing Index (Feb) (2am) USD Fed’s Daly Speaks (2:20am) USD Fed's Barr Speaks (5am) AUD Wage Price Index (Q4) (11:30am) NZD RBNZ Decision (12pm) JPY BoJ’s Takata Speaks (12:30pm) NZD RBNZ Governor Orr Speaks (1pm) GBP CPI Inflation (Jan) (6pm)
THURSDAY (20th February) USD Housing Starts/Building Permits (Jan) (12:30am) USD FOMC Meeting Minutes (6am) USD Fed’s Jefferson Speaks (9am) AUD Jobs Report (Jan) (11:30am) CNY Loan Prime Rate (1yr/5yr) (12pm)
FRIDAY (21st February) EUR ECB’s Makhlouf Speaks (12am) USD Initial Jobless Claims (12:30am) USD Philly Fed Survey (Feb) (12:30am) USD Fed’s Goolsbee Speaks (1:35am) EUR ECB’s Nagel Speaks (3am) USD Fed’s Musalem Speaks (4:05am) 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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