Overnight Market Wrap

Global market sentiment: Fed chair Powell’s speech pushed up bond yields at the front of the curve, and the US dollar index nudged higher. The S&P500 closed up 0.7%.

Currencies: The US dollar index closed up 0.1% on the day, reaching a three-month high. EUR rose from 1.0778 to 1.0800. USD/JPY rose from 146.07 to 146.45. AUD roundtripped from 0.6404 to 0.6441, and back. NZD roundtripped from 0.5903 to 0.5943, and back. AUD/NZD roundtripped from 1.0850 to 1.0872, and back.

Interest rates: US 2yr treasury yields rose from 5.02% to 5.08%, while the 10yr yield roundtripped from 4.24% to 4.28%, and back. Markets currently price the Fed funds rate, currently 5.375% (mid), to be 6bp higher at the next meeting on 21 September.

Australian 3yr government bond yields (futures) ranged between 3.82% and 3.87% while the 10yr yield fell from 4.18% to 4.13%. Markets currently price the RBA cash rate, currently at 4.10%, to be 1bp higher in September, and to peak at 4.20% in March.

New Zealand markets are pricing the RBNZ OCR, currently 5.50%, to be 4bp higher at the next meeting on 4 October and to peak at 5.66% in February.

Commodities: Brent crude oil rose 1.5% to $85/b, copper down 0.1%, iron ore rose 1.4% to $116/t, and gold fell 0.2%.

Event Wrap

Fed chair Powell’s speech reiterated a slightly hawkish stance, noting the Fed’s determination to achieve their 2% goal and its preparedness to raise rates further if needed. Powell expressed concerns over the economy not slowing as they might have expected but also noted that the Fed needed to “proceed carefully” to balance the risk of tightening monetary policy too much against the risk of tightening too little.

University of Michigan Consumer Sentiment Index slipped back to 69.6 (initial read 71.2, prior 71.6). Inflation expectations lifted: 1yr ticked back to 3.5% from prior 3.4%; 5-10yr revised up to be unchanged at 3.0%.

Event Outlook

Australia: Nominal retail sales are expected to rise moderately in July but stall on a real per capita basis (Westpac f/c: 0.4%).

NZ: The monthly employment indicator will likely hold flat in July, a tentative signal of tapering uptrend in jobs growth (Westpac f/c: 0.0%).

US: Like most other regional surveys, the Dallas Fed index will continue pointing to a fragile manufacturing outlook (market f/c: –19). The FOMC’s Barr is also due to speak.

Market Outlook

AUD/USD 1 day: The downside remains vulnerable, targeting 0.6365 multiday.

AUD/USD 1-3 month: The Aussie has faced strong headwinds this month which seem unlikely to abate near term. The RBA’s August statement gave the impression that the bar for another hike is quite high. Soft readings on wages and jobs reinforce Westpac’s view that the cash rate has peaked at 4.1%, well below the Fed. The US$ has made broad gains that should be sustained by solid economic data and high long-end yields. Adding to pressure on the A$, China’s sluggish growth and investor concerns over the property and financial sectors look set to persist. We expect short-covering rallies at times but the trend into September is likely to remain downward, with the October 2022 lows around 0.6200 an obvious target. (18 August)

NZD/USD 1 day: Potential for further downside below 0.5886.

NZD/USD 1-3 month: The decline from the mid-July peak of 0.6412 remains in progress, and could test 0.5800 during the weeks ahead. The US economy remains resilient, supporting the USD near term. In addition, the near-term outlook for NZ commodity prices is weak. Multi-month, clear signs of disinflation in the US and upbeat global risk sentiment will be required for the USD to weaken and cause a NZD/USD rebound. (18 August)

AUD/NZD 1 day: Consolidating in a contracting range between 1.0740 and 1.0880.

AUD/NZD 1-3 month: Further weakness is expected, with potential to test 1.0600 during the month ahead. Yields spreads, which have been the dominant driver of the cross over the past year, have recently moved against the AUD, as expectations of further RBA hikes have receded. In addition, there is little evidence of the awaited recovery in China’s economy. (3 August)

AU swap yields 1 day: The 3yr swap rate should open around 4.11%, the 10yr at 4.51%.

AU swap yields 1-3 month: The RBA remained paused at its August meeting, its hiking cycle probably complete. The 3yr swap should be capped at 4.60%, with potential for sub-4.00% multi-month. (3 August)

NZ swap yields 1 day: NZ 2y swap rates should open down 1bp at 5.55%, the 10yr down 2bp at 4.85%, in response to global (particularly US and AU) interest rate movements.

NZ swap yields 1-3 month: The RBNZ since May has signalled the hiking cycle is probably complete, but at the August MPS it did leave the door open to such. Our economists still forecast one more hike, in November, while markets are opting for February. The 2yr swap rate should remain below the 5.75% cycle high formed in July. (19 August)

Shania Bonenkamp

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