FX Daily
Risk sentiment improved further on Friday amid receding recession fears, the S&P500 closing up 3.1%. The defensive US dollar fell, AUD/USD up modestly to 0.6940. Bond yields rose slightly. US inflation expectations were revised slightly lower. Today’s light calendar includes US May durable goods orders.
Friday's Highlights
- Australia’s data calendar was empty again. AUD/USD traded a very tight 0.6890 – 0.6919 range, with a slight upward bias. Regional equities followed Wall Street’s positive lead, major indices a sea of green. The ASX 200’s 0.7% gain was about middle of the pack. UK June GfK consumer confidence dropped to a record low and the Conservatives lost two by-elections by wide margins.
Currency Markets
- The US dollar was mostly a little softer on the day. EUR/USD rose from 1.0520 to 1.0555, GBP/USD up 10 pips to 1.2270. USD/JPY is a touch higher at 135.15. AUD/USD rose from 0.6900 to 0.6940. NZD/USD rose 35 pips to 0.6310. AUD/NZD rose 15 pips to 1.1000.
- US new home sales in May surprised at 696k annualised (est. 590k), reportedly due to buyers locking in of mortgage rates. June University of Michigan consumer sentiment was revised lower to 50.0 (initial reading 50.2), with current conditions marked down to 53.9 (initially 55.3), although expectations were slightly higher at 47.5 (from 46.8). Inflation expectations for 1yr-ahead was reduced to 5.3% from 5.4%, and the 5-10yr ahead measure was reduced from 3.3% to 3.1%.
- San Francisco Fed president Daly thinks a 75bp hike in July is needed to get to neutral as quickly as possible, although 50bp could be warranted if the economy slows more than expected. She sees neutral around 3.1%, adding it is around 2.5% when inflation is stable around 2%. Longer run inflation expectations are still fairly well anchored.
- St. Louis Fed president Bullard reiterated that front loading rate hikes is "a good idea". The actions should slow the economy back to a "trend pace" of growth. He is not yet seeing signs of a pullback from the household sector, and thinks it is too early to be having a debate on recession risks.
- Germany’s June IFO business survey was slightly disappointing, Climate 92.3, Current 99.3, and Expectations 85.8 (est Climate 92.8, Current 99.0, Expectations 87.4).
- RBA Governor Lowe appeared on a panel on the Challenges of Global Monetary Policy. He affirmed that the RBA will be discussing a hike of between 25bps and 50bps. Lowe referenced the resilient economy and suggested that there would not be a recession, but that the path to low inflation was “narrow”.
Interest Rates
- US bond yields rose on Friday, as risk sentiment improved slightly despite recession fears. 2yr government bond yields rose from 3.04% to 3.06%, and 10yr government bond yields rose from 3.09% to 3.13%.
- Australian bond yields took trend from their US counterparts, yields rose and the curve flattened slightly. 3yr government bond yields (futures) rose from 3.38% to 3.44%, and 10yr government bond yields (futures) rose from 3.72% to 3.77%. Markets are pricing the cash rate to be 44bps higher by the July meeting, and 240bp higher by year end. The AU-US 10yr bond spread is now at 64bps.
- The more positive risk sentiment on Friday saw indices snap tighter with Main in 4bp to 109 as it took back some of the widening seen in recent days and CDX was 4.5bp tighter to 94 which marks its lows for the week. Cash spreads were also in positive territory but lagged the move in indices on a typically more subdued Friday session that saw no primary activity.
Commodity markets
- Crude markets posted gains Friday as positive risk sentiment in global markets lifted prices. The August WTI contract rose $3.35 to $107.62 while the August Brent contract rose $3.07 to $113.12. However, despite the solid gains Friday, prices posted back-to-back weekly losses with WTI down 1.7% on the week after Chair Powell emphasised the Fed’s “unconditional” commitment to fighting inflation earlier in the week. The G7 meeting was said to be getting closer to agreeing price caps on Russian crude last night. Under the scheme, Europe would limit the availability of shipping and insurance, with services only available to fuel that was captured by the cap. The cap will need all 27 states to agree and the UK to co-ordinate the insurance ban. Talks continue today with “partner” countries joining including India.
- Despite the positive risk sentiment in equity markets, metals had a poor day Friday and a shocking week. Copper fell 1% Friday at $8,322, aluminium down 1.1% at $2,450, zinc down 4.2% at $3,346, nickel down 8% at $22,100 and tin down 8.9% at $24,590. Copper fell 7% last week, nickel 14% and tin 21%. That’s the worst week for tin since the 1980s. The LMEX index is down 14% so far this quarter while the Bloomberg Industrial Metals Spot Subindex is down 26%, headed for the biggest drop since the end of 2008. All this is despite the aggressive tightening in inventory with global aluminium inventory down 33% so far this quarter to fresh lows back to 2005 and zinc down 31%.
- Finally note that iron ore was mixed Friday with the July SGX contract up 25c at $117.45 while the 62% Mysteel index fell $1.6 to $114.90. The Mysteel index fell 5% on the week as steel mills idled plant, steel prices slumped, and steel inventory rose. However, iron ore port inventory fell by another 1.5% last week according to Steelhome.
Event Risk
- Australia’s calendar is quiet until May retail sales on Wednesday.
- China: Industrial profits will build over the year as COVID-19 disruptions fade.
- The three-day ECB Forum on Central Banking will provide insight into “Challenges for monetary policy in a rapidly changing world.” ECB President Lagarde delivers welcoming remarks but her keynote speech is Tuesday.
- US: Supply issues are a headwind to durable goods orders in May (market f/c: 0.2%). A decline in pending home sales is anticipated in May as rising mortgage rates cool housing demand (market f/c: -3.9%). The June Dallas Fed index should continue to reflect manufacturers’ concerns around elevated cost pressures (market f/c: -6.5).
Jessica Ren, Rates Strategist, 6128253 4214, jessica.ren@westpac.com.au
Duncan Chellew, Credit Strategist, (61 2) 8254 3509, dchellew@westpac.com.au
Robert Rennie, Head of Financial Market Strategy, (61 2) 8254 8063 , rrennie@westpac.com.au
Sean Callow, Senior Currency Strategist, Sydney, (61 2) 8253 4432 , scallow@westpac.com.au
Tim Riddell, Macro Strategist, (44 207) 6217129, tim.riddell@westpac.com.au
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