USD At Crossroads, Just Like US CPI

AUD: China-Australia relations thaw further, but rates more important

The AUD has received some good news of late including bounces in business and consumer confidence and a further thawing of relations between Australia and China. On the latter, China has announced an expedited investigation into the antidumping tariffs it levied on Australian barley in return for Australia suspending its case against China on the tariffs at the WTO. The barley tariffs along with other trade barriers against Australian imports of wine, seafood, meat, and coal were erected by China after Australia’s previous conservative government called for an international inquiry into the origins of Covid-19 and a concomitant deterioration in relations between Australia and its largest trading partner. China has already loosened restrictions on Australian coal, and the barley template could be used to ease restrictions on other Australian imports. While the warming of relations between Australia and China makes for good headlines, they are a marginal positive for the AUD, in my view. China’s trade barriers have had only a small impact on Australia’s trade balance. Australia has been able to sell its exports elsewhere (albeit at lower prices) and excluding coal, the blocked exports represent less than 5% of Australia’s total exports. Coal prices were supported by the Russia-Ukraine war. More important for AUD/USD on the day will be the Australian labour market data as relative rates remain the focus for the exchange rate along with risk sentiment. Australia’s tight labour market and the threat of stronger wages growth are keeping the RBA on a tightening bias. While Australian jobs growth showed a strong rebound in February, this was partly due to a statistical anomaly as workers returned to work from their summer holidays later than usual. Employment growth will also likely slow in line with weaker leading indicators.

CAD: on a long break with the BoC

As we all know, BoC has decided to not hike the rates on the MP this morning at 00:30. As a result, the 2Y USD-CAD swap spread has just tightened to its narrowest point since last September when it flipped back into positive territory. Canadian money markets indeed price-in steady rates for the rest of the year, with only a slight chance for cuts. Unless the bank announces that its tightening cycle is over for good, such a position should not be challenged by the outcome of today’s BoC meeting, at which a resumption of rate hikes appears unlikely anyway. Growing uncertainties across global financial markets calls for caution, while core inflation and wages growth have recently cooled slightly in Canada although remain quite sticky. The BoC may thus want to see more progress in that direction to officially call it a day for this tightening cycle, while its updated base case scenario will surely be closely scrutinised in the new Monetary Policy Report. Ultimately, the CAD still relies more on other factors such as resilient risk appetite and energy prices to recoup some additional ground further down the line, as short CAD positions remain very crowded.

In releasing its latest World Economic Outlook earlier this week, the IMF warned that the global economy was entering a 'perilous phase'. One of the reasons cited was sticky inflation.

USD: US March CPI to set the tone

In releasing its World Economic Outlook ( https://www.imf.org/en/Publications/WEO/Issues/2023/04/11/world-economic-outlook-april-2023 ) earlier this week, the IMF warned that slowing global growth, sticky inflation, the risk of financial instability coupled with structural factors like climate change and global fragmentation all contributed to the global economy entering a 'perilous phase'. Notably global growth was going to be led lower by declines in the Advanced Economies as recent tightening cycles hit home. And the IMF felt that tight monetary policy was still the appropriate course of action now. Financial markets are probably a little further ahead than the IMF and while allowing perhaps for one last Federal Reserve rate hike over coming months are very much focused on the US hard landing and a 200bp Fed easing cycle over the next 24 months.

Growth Projection

Growth Projection by Region

Undoubtedly there will be a lot of noise in the minutes and it is unclear what they will mean for current market pricing of a final 25bp hike in May (75% priced) and a subsequent 60bp easing cycle by year-end.

70.4% of the market is now pricing a 25bp hike in May meeting (03/05/2023)

Two-year US Treasury yields are already trading at a 100bp discount to the Fed funds rate, a discount which could move to 125bp if the Fed hikes in May. Historically, the 125-150bp marks a deep historic discount for US two-year yields, and much substantial further downside for two-year yields may only emerge when the Fed is ready or has started easing - probably in the fourth quarter.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.