Macro/FX Watch: USD safety bid to be tested by retail sales and Fedspeak

USD: US retail sales and Fed speak on watch

The safe haven bid retreated on Monday with a diplomatic push to contain the spread of the Middle East conflict. Dollar slipped but the DXY index stays above the key 106 mark, and further bouts of risk aversion cannot be ruled out despite US efforts to prevent Iran or Hezbollah from opening a new front in the Israel-Hamas conflict. Warnings from Iran, however, have continued, and nothing seems to have changed on the ground. In fact, the reversals on Monday in safe-haven assets remained rather shallow, suggesting only a non-materialization of the worst case scenario rather than any improvements in the base case.

The US dollar could still remain supported on Fed’s higher-for-longer as well as the geopolitical risk premium. US data focus has shifted away from inflation to growth lately, and that makes retail sales out today a key metric to watch. Retail sales is expected to rise 0.3% MoM in September, cooling from the 0.6% pace in August, while the core measure (ex-auto) is seen rising 0.2% MoM, and also slowing from 0.6% previously. There are risks that numbers could come in softer given the recent rise in credit card delinquencies and restart of student loan repayments. Still, the labor market continues to hold up for now and that could have supported consumer spending. A retail sales print away from consensus could be key for short-end US yields, but it remains hard to see a significant downside for the USD even in the event of a softer print given the geopolitical overhang.

What has also been a key driver for the US dollar just before the geopolitical tensions flared up last weekend was the Fed speak turning less hawkish. Many Fed speakers started to hint that the rise in long-end bond yields could substitute as a Fed rate hike, and markets had priced out the odds of another rate hike from the Fed for this year to less than 30% before a hot CPI brought it back to around 35% again. We get a lot more Fedspeak this week before the quiet period ahead of the next Fed meeting kicks off. Williams and Kashkari will be speaking today, but Waller (usually a hawk) could be key tomorrow. Focus will be on Chair Powell on Thursday who is yet to confirm if he agrees with the view that the rise in long-end yields could mean that the Fed may not have to hike more. This, while unlikely, could bring dollar back below 106. Powell is more likely to stay neutral in light of the geopolitical uncertainty.

Market Takeaway: Dollar could remain supported as geopolitical risks remain, and DXY index could re-test early Oct highs of 107.35 if there were any risks of the conflict escalating. However, retail sales and Fedspeak this week could test the dollar’s safety bid.

AUDNZD: Diverging inflation trends?

New Zealand’s Q3 CPI came-in below expectations today at 5.6% YoY, down from 6.0% YoY prior and 5.9% expected. This was also lower than RBNZ’s projection of 6.0%. Falling inflation could provide comfort to RBNZ, and probability of another rate hike by the end of the year dropped from over 30% to 10%. NZDUSD reversed the post-election gains from yesterday to come back and test 0.59 handle, which has held up for now despite several tests since August.

Meanwhile, a slightly hawkish tone in RBA minutes lifted AUDUSD. The minutes suggested that a 25bps rate hike was considered at the October meeting, and there a “low tolerance” for slow return of inflation to target. Australia’s Q3 CPI is due on October 25, and an upside surprise could further fuel higher-for-longer. AUD traders are also likely to have an eye on China’s GDP data due tomorrow. Consensus expects China GDP to come in at 4.5% YoY from 6.3% previously, particularly with improvements in monthly retail sales growth print. If tomorrow’s numbers could confirm a bottoming of Chinese economy, that could push up AUD further this week. However, China concerns will continue to underpin a more cautious reaction, and the trade terms still suggest downside in AUDNZD which has been range-bound this year.

Market Takeaway: Scope of increasing rate hike pricing could bring AUDNZD higher, but the bar to hike rates remain very high for both RBA and RBNZ. A break of 1.10 may be needed to confirm an upside trend.