Market Briefing: Higher for longer
Hawkish Fed. Several Fed speakers reiterated that policy may need to stay restrictive for some time to ensure the war against inflation is won.
USD firm. Hawkish Fed rhetoric dampened risk sentiment. The USD continues to be supported by the upswing in US interest rate expectations.
AUD fading. The AUD reversed course overnight. The RBA rate hiking cycle now looks well priced. Rate differentials should remain in the US' favour.
A more cautious tone across markets. US equities dipped back (S&P500 -1.1%), unwinding the bulk of yesterday’s gains. US bond yields are also a touch lower (down 3-5bps across the curve), though in level terms the US 10-year yield (now 3.62%) is still up near a 1-month high. In FX, the USD is holding up near its recent highs, with EUR drifting down towards 1.07, USD/JPY above 131, and the AUD (now 0.6921) back down near where it started the week.
There was another wave of US Fed speakers overnight, and the underlying message continues to be that while there has been some progress in lowering inflation, the job is far from done. As a result, there is still more work to do with additional rate hikes expected, and importantly that ‘restrictive’ policy settings are predicted to stay in place for an extended period. In a shot across the bow of financial markets, who are pricing in Fed rate cuts from late-2023, Fed Governor Waller stressed that this “might be a long fight, with interest rates higher for longer than some are currently expecting”.
Although markets have recently adjusted their thinking about how high US interest rates could go (markets are now factoring in a Fed funds rate peak of 5.15% by July), we continue to believe there is scope for the market to change its views around how long the very high rates could stay in place. As the chart below shows, the USD has tracked the evolution of US interest rate pricing. A paring back of expectations looking for the Fed to kick off a rate cutting cycle later this year should, in our view, give the USD some more support. The January readings of US CPI (next Wednesday AEDT) and retail sales (next Thursday AEDT) are due next week. These are the major upcoming US data points that could meaningfully impact the market’s Fed interest rate outlook, and in turn the USD.
Global event radar: China CPI/PPI (10th Feb), US CPI (15th Feb), US retail sales (16th Feb), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb).
After edging up towards 0.70 yesterday, the AUD has drifted back as ‘hawkish’ rhetoric from several US Fed members dampened risk sentiment. The AUD (now 0.6921) is effectively back where it was at the start of the week, with the boost generated by the RBA rate hike and guidance flagging further rises fading. The RBA releases its detailed quarterly Statement on Monetary Policy tomorrow.
Interest rate markets are now assuming the RBA cash rate reaches a peak of ~4% by August. This is slightly above where we think the RBA will get to (we see the cash rate rising to 3.85% by April/May), but nevertheless, we doubt the market’s terminal rate pricing can lift much further from here. In our view, the cumulative effect of the RBA’s rapid-fire tightening over the past year should increasingly gain traction, and could begin to meaningfully constrain activity across the indebted household sector and the broader economy. At the same time, a range of forward-looking inflation indicators contained in business surveys have stepped down noticeably, pointing to a deceleration in inflation over the next few quarters, and there are also signs some of the heat is coming out of the labour market (job ads and hiring intentions are off their highs, and reopened international borders mean labour supply is increasing).
FX is a relative price. In our judgement, a potential shift up in longer-dated US interest rate expectations, as a higher for longer Fed view continues to sink in, combined with limited additional upside in Australian interest rate pricing, points to relative differentials remaining in the US’ favour. This can act as an AUD headwind, restricting near-term upside, in our opinion.
AUD event radar: RBA SoMP (10th Feb), China CPI/PPI (10th Feb), US CPI data (15th Feb), AU jobs data (16th Feb), US retail sales (16th Feb), RBA Gov. Lowe speaks (17th Feb), AU wages (22nd Feb), RBNZ meeting (22nd Feb), AU retail sales (28th Feb).
AUD levels to watch (support / resistance): 0.6810, 0.6856 / 0.7050, 0.7172
USD/SGD has traded in a tight 0.6% range centred on 1.3250 so far this week. There looks to be little on the data calendar that should generate a meaningful near-term move in USD/SGD. On the USD side of the ledger, next week’s US CPI and retail sales reports are the major upcoming events.
The bounce in the USD (and USD/SGD) over recent weeks has been driven by the upswing in US interest rates as markets scrambled to factor in further rate hikes by the US Fed. Comments overnight from a range of Fed speakers reinforce our thinking that policymakers remain committed to keeping interest rates are very high levels for an extended period of time, and that there is scope for the markets pricing of a Fed rate cutting cycle starting in late-2023 to be pared back. In our opinion, higher US yields should continue to provide support for the USD (and USD/SGD), with near-term pullbacks likely to be limited.
SGD event radar: China CPI/PPI (10th Feb), US CPI (15th Feb), US retail sales (16th Feb), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb).
SGD levels to watch (support / resistance): 1.3050, 1.3110 / 1.3290, 1.3371
Currency Strategist - APAC
THURSDAY (9th February)
USD Fed’s Williams Speaks (1:15am)
EUR ECB’s Knot Speaks (2am)
USD Fed’s Kashkari Speaks (4:30am)
USD Fed’s Waller Speaks (5:45am)
GBP BoE Governor Bailey Speaks (8:45pm)
FRIDAY (10th February)
NZD Retail Card Spending (Jan) (8:45am)
AUD RBA Statement on Monetary Policy (11:30am)
CNH CPI/PPI Inflation (Jan) (12:30pm)
GBP GDP (Q4) (6pm)
SATURDAY (11th February)
CAD Employment Report (Jan) (12:30am)
GBP BoE’s Pill Speaks (1am)
EUR ECB’s De Cos Speaks (1:10am)
USD Consumer Sentiment (Feb) (2am)
EUR ECB’s Visco Speaks (8pm)
*Note, all times/dates provided are AEDT