FX Daily
Bond yields rose substantially but equities lacked direction, with limited inspiration from data or news. Currencies were mixed, the Aussie underperforming the G10, down slightly to 0.6925. Today’s local calendar is empty again while in the US data includes June consumer confidence and April house prices.
Yesterday's Highlights
- AUD/USD traded a tight 0.6907 to 0.6959 range with virtually no net change at 0.6935, occasionally gyrating on equity price action. There was no local data. Regional equities posted sharp gains, taking their cue from Wall Street’s jump on Friday. The ASX 200’s 1.9% gain was slightly better than most.
Currency Markets
- Major currencies were mixed, European currencies outperforming, Aussie and Kiwi weakest. EUR/USD rose a net 30 pips to 1.0585. GBP/USD was choppy but ultimately unchanged at 1.2265. USD/JPY rose 20 pips to 135.45. AUD/USD edged down slightly to 0.6925. NZD/USD is also a little lower on the day at 0.6300, leaving AUD/NZD at 1.0985.
- US durable goods orders in May were firmer than expected, rising 0.7%m/m (est. +0.2%m/m), with ex-transport up 0.7%m/m (est. +0.3%m/m), signalling stronger than expected business investment in Q2. Pending home sales in May also surprised to the upside, rising 0.7%m/m (est. -3.9%m/m). The June Dallas Fed manufacturing activity survey fell sharply to -17.7 (est. -6.7, prior -7.4) - the lowest level since May 2020, with weakness broad-based.
Interest Rates
- US bond yields rose higher for the second consecutive day, as markets sold off ahead of inflation and GDP data. 2yr government bond yields rose from 3.06% to 3.15%, while the 10yr government bond yields rose from 3.82% to 3.91%.
- Australian bond yields took trend from global price action, yields rose as markets await for next week’s RBA board meeting for more imminent rate hikes. 3yr government bond yields (futures) rose from 3.51% to 3.60%, and 10yr government bond yields (futures) rose from 3.82% to 3.91%. Markets are pricing the cash rate to be 46bps higher by the July meeting, and 250bp higher by year end. Cross market spreads widened on the back of AU underperformance, with the AU-US 10yr bond spread now at 70bps.
- Credit indices were mixed with Main giving back all of its early gains (-3.5bp) to close unchanged at 109.5 as Euro equity also faded, while CDX closed 1bp wider at 95. Cash spreads were also 1-2bp weaker as primary activity resumed after a quiet close to last week. Europe saw 5 IG issuers price EUR3bn with 4 banks in the mix including DB with a EUR800M 15yr covered deal (MS+26) and AIB with a EUR750M green 4nc3yr (MS+200) while Nederlandse Gasunie was the sole corporate, selling a EUR500M 12yr SLB deal at MS+108, which was well wide of the 15yr deal that was done at MS+38 in October. The US saw 4 issuers price USD4.9bn including 2 FA backed deals (Metlife and Northwestern) and a USD1bn 6.25nc5.25yr deal from NatWest (T+227, BBSW+260) in the fins space, while TMCC was the largest issuer on the day with its USD2.75bn 3 tranche deal across 1.5yr (SOFR+65), 3yr (T+80) and 7yr (T+120).
Commodity markets
- Crude markets rose on news that the Libyan National Oil Company could declare force majeure due to political unrest while Petroecuador warned it may halt production after two weeks of protests shut wells. However, news that Iran and the US are returning to Doha to restart talks on removing sanctions on Iran capped crude gains. The August WTI contract is up $2.26 at $109.88 while the August Brent contract is up $2.36 to $115.48. It’s not clear whether G7 leaders will agree on a Russian oil price cap though press reported that French President Macron had suggested that the cap should be applied to all producers, not just Russia. G7 will also explore a price cap on Russian gas. The EIA has yet to confirm a timeline for the release of last week’s petroleum report, though a revised timeline will be released as soon as possible.
- Metals stabilised with aluminium up 1.3% to $2,488 and nickel up 2.17% to $22,885 though copper is down 0.3% to $8,357 and zinc down 0.6%. Tin was the standout – after falling 9% Friday, it jumped 9.7% Monday though it’s still down 46% from the highs in March. Some signs of easing in Covid restrictions in China helped sentiment.
- Finally note that iron ore markets briefly saw trade above $120 on optimism about China’s recovery as key cities show signs of reopening. While the July SGX contract is up just 10c at $117.55, the 62% Mysteel index is up $5.25 at $120.15. High steel inventory is seeing steel production fall though, with mills in the Tangshan region cutting operating rates by the most since March. The UK will decide Thursday whether to extend steel tariffs introduced in 2018 for a further 2 years “to preserve the health of the UK steel industry”.
Event Risk
- US: FHFA’s April house prices and the S&P/Case-Shiller home price index should reflect a slowing in price momentum as rate hikes begin to take effect (market f/c: 1.6% and 1.85% respectively). Inflation worries will continue to weigh on the Conference Board’s survey of consumer confidence in June (market f/c: 100). This series has not been nearly as pessimistic as the University of Michigan measure, still well above the pandemic lows.
- Although robust growth in wholesale inventories is anticipated in May (market f/c: 2.2%), supply-side constraints are an ongoing concern in the Richmond Fed index (market f/c: -5). San Francisco Fed president Mary Daly is also due to speak.
Jessica Ren, Rates Strategist, 6128253 4214, jessica.ren@westpac.com.au
Duncan Chellew, Credit Strategist, (61 2) 8254 3509, dchellew@westpac.com.au
Imre Speizer, Head of NZ Strategy, (64 9) 336 9929 , imre.speizer@westpac.co.nz
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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