Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
FX Update: RBA hike warms up for FOMC main act tomorrow.
John J. Hardy
Chief Macro Strategist
Summary: The RBA meeting overnight saw a larger hike than most expected and fairly hawkish guidance, but while AUD knee-jerked higher on the news, the move has not held well in AUDUSD, even if AUDNZD seemed duly impressed. Elsewhere, it is all about the FOMC meeting on Wednesday and how the US yields at all points on the curve react to the message that Powell and company deliver.
FX Trading focus: RBA impresses with tightening move ahead of FOMC main event
There were quite a range of expectations among those surveyed on the RBA’s likely decision ahead of last night’s meeting, with a minority looking for nothing, most expecting a 15-basis point move to get the rate to an even 0.25% and others looking for 40 basis points to take the rate to 0.50%. Instead, we got a 0.25% hike to take the rate to an awkward 0.35%. The bank also announced that it would not replace maturing assets on its balance sheet (very few of which are expiring this year). In its commentary on the economy, the statement noted the important “there is evidence that labour costs are increasing more quickly” in addition to inflation levels picking up more aggressively. The guidance was for more rate hikes to come and 2-year Australia rates are nearly a full 25 basis points higher than they were yesterday, a chunky move. AUD rallied sharply, taking AUDUSD about a figure higher overnight as AU-US 2-year yield spreads jolted higher and are now close to parity. And yet the move held poorly, showing how firm the USD remains. AUDNZD was another matter, as that pair rocketed will clear of 1.1000 and testing its highs from 2018 – next focus there could be the highest since 2013 of 1.1430.
Elsewhere, the US 10-year Treasury yield tested 3.00% for the first time since late 2018 but retreated slightly this morning, and USDJPY has gotten sticky around the 130.00 level. As I emphasized yesterday, the reaction to the FOMC meeting will be important for JPY crosses in particular if long US yields consolidate lower after their blistering run higher in recent weeks. That could happen even if the Fed surprises with a larger than expected rate (Dear Jay Powell and company: please just hike to 1.00% and stop the upper- and lower-bound nonsense that has outlived its usefulness….) Front loading the hawkishness could actual temper longer yields if the market finally decides that the Fed is bent on getting ahead of the curve.
Chart: EURUSD
Ahead of the FOMC meeting tomorrow night, it is worth zooming out to a weekly chart for the EURUSD and consider where the pair may be headed as it works through the last shreds of the almost 20-year low from early 2017 just below 1.0350. The momentum is vicious and it is hard to see what would turn it back outside of a dramatic end to the war in Ukraine and a collapse of natural gas prices in Europe. On the USD side of the equation, given that the Fed simply cannot allow itself to surprise on the dovish side until at least a couple of solidly lower CPI prints have been registered, together with some markedly weaker economic data, the market would have to stage an enormous “sell the fact” reaction to the FOMC meeting tomorrow to see the USD lower. This pair may be ready to test parity in short order at its current pace of descent. Only a full reversal of the last sell-off wave, a rise above about 1.0750-1.0800 would suggest.
In Hungary, the forint is deservedly weakening again (as I noted recently, most recent wage data was +31.7% year-on-year in March, with public sector employees up +93% on pay raises and bonuses ahead of the April 3 election) and the political tensions with the rest of Europe may be reaching a tipping point as Hungary has said it would veto any move to boycott Russian oil. The next Hungarian CPI data point will be out next Tuesday, and given the wage gains and Retail Sales reported in Hungary, I am either waiting for a further dramatic spike in the CPI or reports that inflation is being under-reported in the country (remember Argentina?).
Table: FX Board of G10 and CNH trend evolution and strength.
The impact of the FOMC on the US dollar, the real stand-out in this market, is the critical focus this week. Later in the week, interesting to watch CNH and JPY once China and Japan return from the long holiday this week and have a look at US yields and the USD post-FOMC.
Table: FX Board Trend Scoreboard for individual pairs.
USDCAD is an interesting one to watch as it has risen into the well-established range highs ahead of 1.3000 ahead of the FOMC tomorrow. AUDJPY is trying to cross back higher, but the chart still looks bearish if it continues to trade below perhaps 93.50. And have a look at the CNH pairs – with CNH crossing into a downtrend against a rising number of other currencies – soon also CNHJPY.
Upcoming Economic Calendar Highlights (all times GMT)
- 1400 – US Mar. Factory Orders
- 1400 – US Mar. JOLTS Job Openings
- 1630 – Canada Bank of Canada’s Rogers to speak
- 2100 – New Zealand RBNZ to publish Financial Stability Report
- 2245 – New Zealand Q1 Employment and Wages Data
- 2300 – RBNZ News Conference
- 0130 – Australia Mar Retail Sales
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