FX Daily
US equities rose for the first time this week. The US dollar showed a surprising degree of weakness. AUD/USD rallied to 6-week highs around 0.7265 with help from a 5% bounce in iron ore prices and firmer oil prices after the OPEC+ meeting.
Today’s data includes Australia April housing finance, US May employment and US May services ISM. Markets in China and the UK are closed for holidays.
Yesterday's Highlights
- Australia’s trade balance for April printed at $10.5bn. This exceeded expectations modestly, Westpac f/c $9.5bn and market median $9.0bn. There were two main sources of surprise. First, a slight upward revision to the March outcome, +0.4bn to $9.7bn. Second, imports edged a little lower, -0.7% (-$0.3bn), rather than edging a little higher as we anticipated, a forecast +0.5%, +$0.2bn. Tourism-related service exports leapt 27% in April, the largest monthly rise since 1986 aside from the Sydney Olympics, though of course off a low base. Risk sentiment was mostly negative, the ASX 200’s -0.8% close similar to many others. AUD/USD duly slid from 0.7175 to 0.7141, but then bounced back to 0.7180 in late trade with some help from iron ore futures, up 5% as Chinese media declared success on the Covid zero policy.
Currency Markets
- The US dollar came under broad-based and sustained selling pressure in European and US trade, without particularly compelling news or data catalysts. EUR/USD rose from 1.0650 to 1.0750. GBP/USD bounced from 1.2480 to 1.2580. USD/JPY slipped 25 pips to 129.85. AUD/USD outperformed, up 90 pips or 1.3% on the day at 0.7265, printing highs since 22 April. NZD/USD rose 75 pips or 1.2% to 0.6560. This left AUD/NZD 10 pips higher on the day, at 1.1080.
- US private sector payrolls (ADP) disappointed with a 128k gain in May (vs 300k expected, April revised lower from 247k to 202k). The services sector was the strongest with a still modest 104k increase. Factory orders in April rose 0.3% (est. +0.7%, prior revised from 2.2% to 1.8%).
- Fed vice-chair Brainard does not expect a pause in September, adding that market pricing for 50bp hikes in June and July seems reasonable. Cleveland Fed president Mester also supports 50bp hikes in June and July, but added it is not clear what will happen in September. If there is "compelling evidence that inflation is moving down, then the pace of rate increases could slow...but if inflation has failed to moderate, then a faster pace" could be needed. She said it is too soon to say that inflation has peaked, and that recession risks have increased but it is still likely that a downturn can be avoided.
Interest Rates
- US bond yields were marginally higher on the day, with soft economic reports and hawkish comments from the Fed adding to the mixed risk sentiment. 2yr government bond yields traded at 2.63%, and 10yr government bond yields rose from 2.90% to 2.91%.
- Australian bond yields rose overnight, underperforming their US counterparts as markets turned its focus to the looming rate hike at the RBA meeting next week. 3yr government bond yields (futures) rose slightly from 3.06% to 3.08%, and 10yr government bond yields (futures) rose from 3.50% to 3.53%. Markets are currently pricing the cash rate to be 36bp higher at the June RBA meeting. Cross market spreads widened on the back of AU bonds underperformance, with the AU-US 10yr bond spread now at 61bps.
- Credit spreads were also positive with CDX closing a bp tighter at 79.5 and cash spreads continuing the grind we have seen over the last week. In primary, the US saw 4 issuers price USD3bn in a quiet session with Norfolk Southern the sole non-financial issuer (USD750M 31yr), and the market now preparing for a potential jumbo deal from Oracle next week following regulatory approval of its USD28bn acquisition of Cerner.
Commodity markets
- Crude oil prices remained volatile on OPEC output expectations. OPEC+ agreed to increase production though analysts estimate the increase is equivalent to only 0.4% of global demand in the northern summer peak. The 648k barrel per day increase for July and August compares to the 1 million barrel fall in Russian output since its invasion of Ukraine. Brent crude closed up 1.6% at $118/bbl, WTI up 1.4% around $117.
- The LME was closed for the UK holiday. Comex copper closed up 0.2%. Iron ore belatedly took heart from China’s declaration of economic revival after the Shanghai lockdown, SGX July 2022 futures jumping 5.3% to $140/tonne. Spot iron ore rose 5.4% to $143.75/t, a high since 5 May. Dalian coking coal rose 1.6%.
Event Risk
- At 11:30am Syd/9:30am Sing we see further official Australian data for April. Housing finance approvals are set to fall in April given the housing cycle has now peaked and market turnover has sharply declined (Westpac f/c: -3.0%); owner-occupiers are expected to be hit harder than investor loans for the month (Westpac f/c: -3.5% and -2.0% respectively).
- Markets are closed for the annual Dragon Boat festival in China, Hong Kong and Taiwan. Markets remain closed in the UK for the Jubilee holiday.
- Eurozone retail sales are expected to post a muted lift in April with inflation and conflict limiting the full rebound in consumer spending (market f/c: 0.2%). The final estimate of the May S&P Global services PMI is also due (market f/c: 56.3).
- US non-farm payrolls should continue to reflect healthy gains in employment growth in May (Westpac f/c: 370k; market f/c: 323k) pushing the unemployment rate to its likely low for the cycle (Westpac and market f/c: 3.5%). The historically tight labour market should continue to support robust growth in average hourly earnings (Westpac f/c: 0.3%). Meanwhile, the ISM services PMI will likely reflect a healthy services sector in May, with consensus 56.5 versus 57.1 in April.
Jessica Ren, Rates Strategist, 6128253 4214, jessica.ren@westpac.com.au
Imre Speizer, Head of NZ Strategy, (64 9) 336 9929 , imre.speizer@westpac.co.nz
Sean Callow, Senior Currency Strategist, Sydney, (61 2) 8253 4432 , scallow@westpac.com.au
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