Aussie knocked down by US CPI and geopolitics
The Aussie broke down last week as a higher than expected US March CPI prompted a sharp paring back in Fed rate cut expectations. Markets were also jolted by the escalating Middle East crisis. This week the Aussie will focus on March labour force figures, Q1 China GDP, US retail sales and geopolitical developments.
Aussie knocked down by US CPI and geopolitics
The Aussie was coasting in the early part of last week, to a high of 0.6644, until a higher than expected US March CPI prompted a sharp paring back in Fed rate cut expectations, sending Aussie down to 0.6456 by week’s end. Markets were also jolted by the escalating Middle East crisis.
Aussie is starting the week grinding back towards 0.6500 as regional markets show signs of relief that there has been no further escalation following Iran’s attack on Israel over the weekend.
The main global story last week was a higher than expected increase in the US March CPI. Both headline and core rose 0.4% m/m. In annual terms, headline edged up to 3.5% (vs. 3.2% prior) and core remained at 3.8%. Higher than expected CPI inflation prints in Jan and Feb were characterised as “bumps” in the US disinflation trend, but with a third consecutive stronger increase the concern is that there is a stalling of last year’s momentum in bringing inflation rates back down to the Fed’s 2% target.
US bond rates jumped more than 20bp across the board on the stronger CPI increase and Fed rate cut expectations tumbled, with June down to a trivial -5bp in rate cut risk, down from -15bp. Fed rate cut pricing for all of 2024 slipped to -40bp versus -67bp ahead of the CPI release, and the USD index rose to a 5-month high.
Rate cut probabilities for other central banks fell in sympathy with the US move, with the notable exception of the ECB. Last week’s dovish, albeit moderate, shift in the ECB, against the background of relatively more encouraging disinflation progress and soft growth conditions, gave a greenlight to June ECB rate cut bets. Crucially, President Lagarde underscored that the ECB does not take its cue from the Fed.
Markets now fully price a June ECB rate cut and discount -87bp in cuts through to end-2024. So far, the Swiss National Bank is the outlier, the only central bank among the majors to cut rates. But barring any inflation surprises it is very likely they will be joined by the ECB in June.
The contrast between a hawkish repricing in Fed rate cut expectations with a dovish ECB created a lot of volatility in the Aussie-crosses last week. As Aussie slipped to a two-month low against the USD at 0.6456 by week’s end, AUD/EUR was trading through 0.6100, a 2½ month high.
AUD/NZD slipped last week from above 1.0950 to a low of 1.0862, the move triggered by the RBNZ saying that a restrictive monetary policy stance remains necessary. The cross is stabilising around 1.0900 at the start of the week.
The ongoing squeeze in industrial commodity prices continues to periodically cushion the Aussie. Aluminium jumped by a record on the LME Monday in response to new US and UK sanctions banning deliveries of Russian supplies. Aluminium jumped as much as 9.4% at one stage, although later pared its advance. Aluminium has now risen 15% so far in the last month, while copper has gained almost 10%. While geopolitics and idiosyncratic supply risks are driving industrial metals higher, recent strong gains are also playing out against an overlapping trend of PMIs moving into expansionary territory across all the key regions in the new year.
Iron ore is also on firmer ground, at $112.80/t versus sub-$100 levels earlier in the month, while gold continues to surge, briefly trading as high as $2431.52 late last week as markets rushed to safe havens on Mideast geopolitical concerns.
Australia’s data calendar is quiet for most of the week, though Thursday sees labour force figures for March. The previous month’s +117k gain was seen to be mostly a function of large seasonal dynamics and a correction is expected in the March figures.
Global markets will focus on US March retail sales and Q1 GDP figures for China. Data around the new year show Beijing’s ramped up policy support is getting traction and a factory-led rebound is taking hold. But the recovery has been unbalanced, with domestic demand still lacklustre, notably the consumer and property sectors.
Event risk
Monday
US Mar retail sales
Tuesday
China Q1 GDP, China Mar industrial production, retail sales & fixed asset investment
UK Feb employment
Wednesday
NZ Q1 CPI
UK Mar CPI
US Fed Beige Book
Thursday
Aus Mar employment
US March FOMC Meeting Minutes
Friday
Japan Mar CPI
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