AUD
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
Ongoing issues with China’s economy remain a question mark for the AUD. As long as China’s potential for recovery remains uncertain, the path for the AUD remains the same. The RBA took another 25bsp hike at their previous meeting, sparking some speculation that the bank could be finalizing their hiking cycle sooner than expected. But with Core Trimmed CPI >6.0% the hiking cycle is arguable not close to over just yet. For the week ahead, overall risk sensitivity needs to be kept in mind for the AUD, as well as any further developments regarding the recent rumours and speculation of a potential China reopening.
POSSIBLE BULLISH SURPRISES
Data showing China’s growth outlook is improving or surprise announcement at the CCP congress that Covid-zero will end could provide upside for the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk on sentiment could trigger bullish reactions in the AUD. Catalyst that triggers recovery in key export commodities (China stimulus, lifting covid restrictions, new infrastructure projects in China) should be supportive for the AUD.
POSSIBLE BEARISH SURPRISES
Data showing China’s growth outlook is deteriorating or strong affirmation that the covid-zero policy is here to stay could add additional pressure on the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk off sentiment could trigger bearish reactions in the AUD. Catalyst that triggers further weakness in key export commodities (additional China restrictions, demand destruction) could be negative for the AUD.
BIGGER PICTURE
The AUD’s outlook remains neutral but is largely dependent on China and whether key commodities like Iron Ore and Coal can stop their bleeding. Until the covid situation and property issues in China improves materially, and until commodities and China’s growth stabilizes, the AUD is best suited for short-term trades in line with strong short-term sentiment. For the week ahead the main highlight will be the US CPI report which can have a big impact across major asset classes. Apart from that, overall risk sentiment and any additional developments on China’s side with regards to potential reopening will be important to watch.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. At the NOV FOMC presser, Fed Chair Powell shattered any big hopes of a pivot and warned that their SEP expectations for the terminal rate will have to be revised higher. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction for both the USD and US10Y (good data expected to be supportive for the USD and US yields while bad data is expected to pressure the USD and US yields). The past week was a choppy one for the USD, with upside seen after the more hawkish Fed presser, but a unexpected and punchy move lower after Friday’s mixed NFP jobs report.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.5% terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays aggressively hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The week ahead will give us the most recent US CPI data which will be the biggest focus for markets, and we also have UoM Consumer Sentiment to watch. The price action in the USD following Friday’s NFP was interesting, but not something to use with any real conviction to trade into the week ahead. Waiting for CPI and UoM Consumer Sentiment seems like the safest way to approach the USD in the week ahead.
FUNDAMENTAL OUTLOOK: NEUTRAL
BASELINE
Ongoing issues with China’s economy remain a question mark for the AUD. As long as China’s potential for recovery remains uncertain, the path for the AUD remains the same. The RBA took another 25bsp hike at their previous meeting, sparking some speculation that the bank could be finalizing their hiking cycle sooner than expected. But with Core Trimmed CPI >6.0% the hiking cycle is arguable not close to over just yet. For the week ahead, overall risk sensitivity needs to be kept in mind for the AUD, as well as any further developments regarding the recent rumours and speculation of a potential China reopening.
POSSIBLE BULLISH SURPRISES
Data showing China’s growth outlook is improving or surprise announcement at the CCP congress that Covid-zero will end could provide upside for the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk on sentiment could trigger bullish reactions in the AUD. Catalyst that triggers recovery in key export commodities (China stimulus, lifting covid restrictions, new infrastructure projects in China) should be supportive for the AUD.
POSSIBLE BEARISH SURPRISES
Data showing China’s growth outlook is deteriorating or strong affirmation that the covid-zero policy is here to stay could add additional pressure on the AUD. As a risk sensitive currency, catalysts that causes big bouts of risk off sentiment could trigger bearish reactions in the AUD. Catalyst that triggers further weakness in key export commodities (additional China restrictions, demand destruction) could be negative for the AUD.
BIGGER PICTURE
The AUD’s outlook remains neutral but is largely dependent on China and whether key commodities like Iron Ore and Coal can stop their bleeding. Until the covid situation and property issues in China improves materially, and until commodities and China’s growth stabilizes, the AUD is best suited for short-term trades in line with strong short-term sentiment. For the week ahead the main highlight will be the US CPI report which can have a big impact across major asset classes. Apart from that, overall risk sentiment and any additional developments on China’s side with regards to potential reopening will be important to watch.
USD
FUNDAMENTAL OUTLOOK: BULLISH
BASELINE
With headline CPI above 8% and Core CPI seeing another acceleration in the SEP CPI data, the Fed is under pressure to continue hiking rates and ramping up QT. At the NOV FOMC presser, Fed Chair Powell shattered any big hopes of a pivot and warned that their SEP expectations for the terminal rate will have to be revised higher. The Fed is on a data-dependent (meeting-by-meeting) policy stance, meaning incoming growth, inflation and jobs data remains a key driver for short-term USD volatility where we expect a cyclical reaction for both the USD and US10Y (good data expected to be supportive for the USD and US yields while bad data is expected to pressure the USD and US yields). The past week was a choppy one for the USD, with upside seen after the more hawkish Fed presser, but a unexpected and punchy move lower after Friday’s mixed NFP jobs report.
POSSIBLE BULLISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely good growth, inflation or jobs data is expected to trigger short-term bullish reactions in the USD. If the cyclical outlook continues to weaken, the USD’s safe haven status still matters. Any incoming catalysts that increase deep recession fears and triggers strong moves lower in risk assets & bonds can trigger safe haven flows into the USD. With a lot priced for the Fed and USD, the bar is high for hawkish Fed surprises, but any aggressive Fed speak talking up a >5.5% terminal rate can trigger further USD upside.
POSSIBLE BEARISH SURPRISES
With the Fed signalling a data dependent policy stance, we expect a cyclical reaction from the USD with incoming US data. Thus, extremely bad growth, inflation or jobs data is expected to trigger short-term bearish reactions in the USD. If the cyclical outlook starts to improve, the USD’s safe haven status still matters. Any incoming catalysts that decrease deep recession fears and triggers strong moves higher in risk assets & bonds can trigger safe haven outflows out of the USD. With a lot priced in for the Fed and the USD, it won’t take much to disappoint on the dovish side. Any big concerns about growth from Fed speakers could trigger outflows.
BIGGER PICTURE
The fundamental outlook for the USD remains bullish as long as the Fed stays aggressively hawkish and cyclical concerns put pressure on risk sentiment. The data dependent stance from the Fed means that short-term data surprises can pull the USD either way and would be our preferred way of trading the Dollar right now. The week ahead will give us the most recent US CPI data which will be the biggest focus for markets, and we also have UoM Consumer Sentiment to watch. The price action in the USD following Friday’s NFP was interesting, but not something to use with any real conviction to trade into the week ahead. Waiting for CPI and UoM Consumer Sentiment seems like the safest way to approach the USD in the week ahead.