Market Briefing: RBA in focus
Adjustment in Fed expectations. US bond yields continue to rise as markets adjust how high US interest rates could rise.
Stronger USD. The upswing in US rate expectations is supporting the USD. Fed Chair Powell speaks tomorrow morning.
Weaker AUD. Relative rate differentials have moved against the AUD. RBA expected to hike by 25bps today. But how much more from here?
The adjustment in expectations about the outlook for US interest rates, on the back of Friday’s strong US labour market report, has continued. And this is flowing into other markets. US interest rate markets have scrambled to factor in further rate hikes by the US Fed over the next few months. The market is now factoring in a Fed funds rate peak of ~5.1% by mid-2023 (last Thursday the assumed peak was ~4.9%), with the first full rate cut by the Fed now not discounted until year-end.
The shift in thinking about the policy outlook is putting upward pressure on bond yields. The US 2-year yield (now 4.45%) has jumped up 35bps over the past few days, with the benchmark 10-year yield (now 3.63%) up a relatively more modest 24bps. The upswing in bond yields is weighing on equity markets, though signs the US economy is still in a solid spot is providing an offset. The US S&P500 eased another 0.5% overnight, with the tech-focused and more interest rate sensitive NASDAQ underperforming (-1.1%). In FX, the sharp rise in US yields is helping boost the USD. EUR has dipped back below 1.0750 (~2.8% below its recent peak), USD/JPY is above 132.50 for the time since mid-January, and the higher beta AUD remains under pressure. The AUD is just above its 50-day moving average (0.6856), ~3.9% below last week’s lofty heights.
Fed Chair Powell is set to speak tomorrow (4am AEDT). If policy is discussed we expect Chair Powell to reiterate the Fed’s higher for longer interest rate view, that the Fed is determined to keep at it until it is confident inflation is on a sustainable path back down to its 2%pa target, and that based on its macro-outlook the Fed doesn’t foresee rate cuts in 2023. Central banks are students of history and want to avoid a repeat of the policy and inflation mistakes of the 1970s. We continue to think the Fed would prefer to err on the side of doing too much than too little. Indeed, this was the message overnight from the BoE’s Mann and ECB’s Holzmann who stressed that the bigger risk is to not do enough to fight inflation. We continue to think the USD can recover more lost ground in the near-term.
Global event radar: US Fed Chair Powell speaks (tomorrow), US CPI (15th Feb), US retail sales (16th Feb), China CPI/PPI (16th Feb), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb).
AUD has continued to fall back and is now tracking just above its 50-day moving average (0.6856). The AUD's ~3.9% decline since last Thursday reflects the rebound in the USD, wobbles in risk assets, and shift in relative interest rate differentials as markets adjust their thinking about how high US interest rates may rise this cycle and how long these restrictive settings could stay in place.
AUD and market volatility looks set to remain elevated over the next few days. Tomorrow morning Fed Chair Powell speaks (4am AEDT), and if discussed, we think the Fed’s higher for longer outlook could be repeated, reinforcing the lift in US rate expectations and bounce back in the USD.
Ahead of Chair Powell, today’s RBA meeting is the local focus (announcement 2:30pm AEDT). Inflation is still too high, and the RBA wants to prevent a wage-price spiral from unfolding. We, and the market consensus, think the RBA will raise rates another 25bps, taking the cash rate to 3.35%. Another hike would make this the 9th straight meeting the RBA has raised rates. This is the fastest hiking cycle since at least the mid-1990s. The key question is how much more will the RBA deliver? Beyond today we think the RBA may only raise rates one more time. Policy changes work with a lag. There is a lot of tightening now in the system that should gain traction this year, particularly given high household debt levels and as the large pool of fixed rate loans are refinanced. We think there is a chance the pragmatic RBA follows the lead of some other central banks and starts to open the door to a conditional pause by softening its guidance regarding future rate rises. In our view, indications the RBA is nearing the end of its cycle could exert more pressure on the AUD.
AUD event radar: RBA policy meeting (today), US Fed Chair Powell speaks (tomorrow), US CPI data (15th Feb), AU jobs data (16th Feb), US retail sales (16th Feb), China CPI/PPI (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 / 0.7150, 0.7172
USD/SGD has continued to rebound. At ~1.3280 USD/SGD is now ~1.9% above last week’s low, and is at its highest level since mid-January. The recalibration in market expectations about US interest rate policy, and the upswing in US bond yields is supporting the USD. We think this run can continue in the near-term.
Fed Chair Powell speaks tomorrow morning. If the economic environment and policy outlook are discussed we expect Chair Powell to repeat the Fed’s view that the labour market is still too tight, more work on the policy front needs to be done to truly tame inflation, and that thoughts about rate cuts in 2023 are misplaced. In our opinion, this type of message should reinforce the upward shift in US interest rate pricing that has come through since the release of last week’s strong US labour market data, and we think it should continue to underpin the USD. We think USD/SGD could soon test its 50-day moving average (1.3381).
SGD event radar: RBA meeting (today), US Fed Chair Powell speaks (tomorrow), US CPI (15th Feb), US retail sales (16th Feb), China CPI/PPI (16th Feb), Eurozone PMIs (21st Feb), FOMC meeting minutes (23rd Feb).
SGD levels to watch (support / resistance): 1.3050, 1.3110 / 1.3290, 1.3381
Currency Strategist - APAC
TUESDAY (7th February)
GBP BoE’s Pill Speaks (4am)
AUD Trade Balance (Dec) (11:30am)
AUD RBA Policy Meeting (Feb) (2:30pm)
EUR German Industrial Production (Dec) (6pm)
GBP BoE’s Ramsden Speaks (8pm)
GBP BoE’s Pill Speaks (9:15pm)
WEDNESDAY (8th February)
USD Fed Chair Powell Speaks (4am)
EUR ECB’s Schnabel Speaks (4am)
CAD BoC Governor Macklem Speaks (4:30am)
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