AUDNZD | Australian Dollar New Zealand Dollar STRONG BUY
Downside risks for NZD remain, though, given asymmetric risks to RBNZ pricing. The persistent curve inversion suggests markets are pricing in a risk of a policy mistake. We are watching the Feb RBNZ meeting closely, particularly for guidance on the balance sheet,"
"We expect AU D to outperform NZD (targeting 1.08) given risks that swap traders reduce expectations for RBNZ policy (current implying a likelihood of 6 hikes in the next 12 months),"
"We expect AU D to outperform NZD (targeting 1.08) given risks that swap traders reduce expectations for RBNZ policy (current implying a likelihood of 6 hikes in the next 12 months),"
Comment:
SHORT TERM BULL CLOSED WITH PROFIT
Comment:
mID TERM TREND bullish still active
Comment:
Three central bank meetings; three 25 basis-point rate hikes.
Against consensus, the Reserve Bank of Australia (RBA) surprised markets early last week, increasing its Official Cash Rate (OCR) by 25 basis points to 3.85%, with many desks now pricing in a 4.1% terminal rate. This followed the previous meeting where the central bank kept rates on hold and marks the eleventh-rate hike overall since May 2022. Unsurprisingly, market volatility increased following the announcement, adjusting to the recent surprise, with AUD/USD aggressively rallying and the ASX 200 seeking lower levels.
Wednesday was also a big day for the markets. As widely expected, the Fed hiked the Federal Funds target rate by another 25 basis points to 5.0%-5.25%. This represents the tenth-rate hike since March 2022. I noted the following in previous writing (italics):
The FOMC statement communicated a less hawkish tone in its language used, noting that it is ‘determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time’, marking a change in language from the prior FOMC statement where it communicated that it ‘anticipates that some policy firming may be appropriate’. This echoes a vibe of a possible pause at the next meeting scheduled for 14 June; markets are also now pricing in a strong possibility of a rate pause.
Thirty minutes after the announcement, Fed Chairman Jerome Powell took to the stage and struck more of a hawkish tone. Key points were that Powell reaffirmed the change in language in the FOMC statement as ‘meaningful’, changing from ‘anticipates’ to ‘determining’. Powell added that inflation is far above the central bank’s target of 2% and that the Fed is ‘prepared to do more’; decisions from June will also be driven by incoming data—meeting by meeting. He also noted that the labour market remains tight, the economy is likely to face headwinds and communicated that the ‘banking system is sound and resilient’.
Thursday welcomed the European Central Bank (ECB), which increased all three main policy rates by 25 basis points. This marks the seventh consecutive rate increase since mid-2022 and represents 375 basis points of tightening. I also noted the following in recent writing (italics):
As of writing, markets are pricing in the possibility of about another two rate hikes before the ECB looks to hit the pause button. In her post-announcement presser, Christine Lagarde—the President of the ECB—also communicated the possibility of additional rate hikes to combat inflation. Euro area headline inflation slightly increased to 7.0% in April (from March’s 6.9%), essentially snapping a five-month period of slowing price increases. The current inflation rate remains more than three times higher than the central bank’s target. So, overall, the job is not done at the ECB, and the central bank is likely to continue its policy-firming schedule in 25 basis-point increments.
US non-farm payroll data was also released on Friday. Headline non-farm payrolls revealed that 253,000 new payrolls were added in April, comfortably north of the median consensus of 180,000 and nearer the upper end of the forecast range (265,000). While this is indeed a hot labour print, markets are pricing in the possibility of a pause for the next FOMC meeting on 14 June, with a small chance of another 25 basis-point hike. However, things may—and likely will—change before the event; we have two inflation releases, one of which is this week on Wednesday and one a day ahead of the FOMC meeting on 13 June, and, of course, we have another jobs release on 2 June.
Against consensus, the Reserve Bank of Australia (RBA) surprised markets early last week, increasing its Official Cash Rate (OCR) by 25 basis points to 3.85%, with many desks now pricing in a 4.1% terminal rate. This followed the previous meeting where the central bank kept rates on hold and marks the eleventh-rate hike overall since May 2022. Unsurprisingly, market volatility increased following the announcement, adjusting to the recent surprise, with AUD/USD aggressively rallying and the ASX 200 seeking lower levels.
Wednesday was also a big day for the markets. As widely expected, the Fed hiked the Federal Funds target rate by another 25 basis points to 5.0%-5.25%. This represents the tenth-rate hike since March 2022. I noted the following in previous writing (italics):
The FOMC statement communicated a less hawkish tone in its language used, noting that it is ‘determining the extent to which additional policy firming may be appropriate to return inflation to 2% over time’, marking a change in language from the prior FOMC statement where it communicated that it ‘anticipates that some policy firming may be appropriate’. This echoes a vibe of a possible pause at the next meeting scheduled for 14 June; markets are also now pricing in a strong possibility of a rate pause.
Thirty minutes after the announcement, Fed Chairman Jerome Powell took to the stage and struck more of a hawkish tone. Key points were that Powell reaffirmed the change in language in the FOMC statement as ‘meaningful’, changing from ‘anticipates’ to ‘determining’. Powell added that inflation is far above the central bank’s target of 2% and that the Fed is ‘prepared to do more’; decisions from June will also be driven by incoming data—meeting by meeting. He also noted that the labour market remains tight, the economy is likely to face headwinds and communicated that the ‘banking system is sound and resilient’.
Thursday welcomed the European Central Bank (ECB), which increased all three main policy rates by 25 basis points. This marks the seventh consecutive rate increase since mid-2022 and represents 375 basis points of tightening. I also noted the following in recent writing (italics):
As of writing, markets are pricing in the possibility of about another two rate hikes before the ECB looks to hit the pause button. In her post-announcement presser, Christine Lagarde—the President of the ECB—also communicated the possibility of additional rate hikes to combat inflation. Euro area headline inflation slightly increased to 7.0% in April (from March’s 6.9%), essentially snapping a five-month period of slowing price increases. The current inflation rate remains more than three times higher than the central bank’s target. So, overall, the job is not done at the ECB, and the central bank is likely to continue its policy-firming schedule in 25 basis-point increments.
US non-farm payroll data was also released on Friday. Headline non-farm payrolls revealed that 253,000 new payrolls were added in April, comfortably north of the median consensus of 180,000 and nearer the upper end of the forecast range (265,000). While this is indeed a hot labour print, markets are pricing in the possibility of a pause for the next FOMC meeting on 14 June, with a small chance of another 25 basis-point hike. However, things may—and likely will—change before the event; we have two inflation releases, one of which is this week on Wednesday and one a day ahead of the FOMC meeting on 13 June, and, of course, we have another jobs release on 2 June.
Comment:
Australian business confidence figures failed to impress this morning. Stable labor costs and rising purchase costs will be red flags for the RBA
Comment:
The NAB Business Confidence Index increased from -1 to 0 in April versus a forecasted +1. While the headline figure drew interest, the sub-components also needed consideration. Focal points included Labor costs, purchase costs, final product costs, and retail prices. However, forward orders also drew interest.
According to the April survey,
Business conditions slipped by 2 points to +14. Despite the downward trend, the Index remained above average.
Leading indicators disappointed, with forward orders down from +3 to +1 and CAPEX falling by 2 points to +6.
However, it was a mixed set of price and cost Indexes.
Labor costs held steady at +1.9, while purchase costs increased from +1.9 to +2.3.
Final Products Prices slipped from +1.3 to +1.1, with retail prices falling from 1.7 to +1.4.
Despite the fall in final product prices, stable labor costs and rising purchase costs will likely draw the RBA’s attention.
Last week, the RBA noted that wage growth was pushing inflation higher. An upward trend in wage growth and softer inflation, albeit moderate, would improve household disposable income and support a pickup in household spending.
Other Australian economic indicators included building approvals, which slipped by 0.1% in Mach versus a forecasted 3.0 increase. In February, building approvals jumped by 3.9%.
AUD/USD Reaction to the Australian NAB Business Confidence Survey
Before the business confidence numbers, the AUD/USD rose to a high of $0.67552 before falling to a pre-stat low of $0.67399.
However, in response to the business confidence figures, the AUD/USD rose from $0.67452 to a post-report high of $0.67543.
This morning, the AUD/USD was down 0.02% to $0.67485.
According to the April survey,
Business conditions slipped by 2 points to +14. Despite the downward trend, the Index remained above average.
Leading indicators disappointed, with forward orders down from +3 to +1 and CAPEX falling by 2 points to +6.
However, it was a mixed set of price and cost Indexes.
Labor costs held steady at +1.9, while purchase costs increased from +1.9 to +2.3.
Final Products Prices slipped from +1.3 to +1.1, with retail prices falling from 1.7 to +1.4.
Despite the fall in final product prices, stable labor costs and rising purchase costs will likely draw the RBA’s attention.
Last week, the RBA noted that wage growth was pushing inflation higher. An upward trend in wage growth and softer inflation, albeit moderate, would improve household disposable income and support a pickup in household spending.
Other Australian economic indicators included building approvals, which slipped by 0.1% in Mach versus a forecasted 3.0 increase. In February, building approvals jumped by 3.9%.
AUD/USD Reaction to the Australian NAB Business Confidence Survey
Before the business confidence numbers, the AUD/USD rose to a high of $0.67552 before falling to a pre-stat low of $0.67399.
However, in response to the business confidence figures, the AUD/USD rose from $0.67452 to a post-report high of $0.67543.
This morning, the AUD/USD was down 0.02% to $0.67485.