USD: No Minutes to Waste

Asia overnight

Despite US manufacturing PMI data indicating contraction, services PMI data showed a rebound above 50, reaching expansion territory. This resulted in higher UST yields in North America, which adversely affected investor sentiment in Asia. Additionally, geopolitical risks were also weighing on sentiment, as Russian President Vladimir Putin threatened to escalate the situation if the west supplied long-range weapons to Ukraine, while also suspending the New START nuclear arms reduction treaty with the US. Currently, most Asian bourses are trading lower, except for S&P 500 futures which are trading higher. The USD underperformed the rest of the G10 currencies, except for AUD, due to a slight decrease in UST yields. The AUD was weighed down by a downside surprise in Australian wages growth. The hawkish stance of the RBNZ resulted in the NZD being the top-performing G10 currency during the Asian session, while the JPY was supported by the 10Y JGB yield surpassing the BoJ's 0.50% cap for the second day as investors await the approval hearing of BoJ Governor nominee Kazuo Ueda on Friday.

USD: No Minutes to Waste

Following Monday's US bank holiday, the USD gained traction yesterday, buoyed by the sell-off in both equity and fixed income markets. However, the marginal upside surprise in the US flash PMIs for February seems insufficient, as this leading indicator has historically had poor predictive power in terms of activity in the real economy. Today, the US macro calendar lacks any significant data releases, and the spotlight will be entirely on the publication of the February Fed minutes. Previously, the market perceived the outcome as somewhat dovish, particularly as Fed Chair Jerome Powell refrained from contradicting expectations of rate cuts in H223. At that time, US money markets were only pricing in a bit more than a last 25bp rate hike by the Fed, along with 50bp worth of cuts by year-end. However, they have since adjusted to discount over 75bp worth of rate hikes due to the release of upbeat US jobs and activity data and more persistent inflation prints. In this context, it may be challenging for today's FOMC minutes to provide more hawkish material, as some Fed members already indicated that they saw a compelling case for a 50bp rate hike at the time of the February meeting. Consequently, the USD may pause until Friday's more critical release of the PCE deflators for January.

EUR: A Blast From The Not So Distant Past

Despite the recent recovery in Eurozone PMIs and multi-year lows in European natural gas prices, the conflict in Ukraine has reemerged as a potential driver of the EUR. Although fears of a European energy crisis have diminished in recent months, yesterday's escalation of tensions between Russia and the West could cause Eurozone business sentiment to decline once again. This could complicate efforts to replenish gas reserves in the spring and summer months, leading to higher energy costs and exacerbating the Eurozone's external imbalance. Additionally, the reopening of the Chinese economy could further increase energy costs, which could lead to peripheral risks and potentially require European government intervention. Although the German ifo could continue the trend of improving Eurozone data, the growing geopolitical risks in Europe may outweigh any positive economic indicators, and thus the EUR may not benefit.

NZD: RBNZ Still a Screeching Hawk

The Reserve Bank of New Zealand (RBNZ) has increased its Official Cash Rate (OCR) by 50bp to 4.75%, in line with expectations. However, the RBNZ's Monetary Policy Statement (MPS) indicates that it plans to increase its OCR by at least another 75bp to reach 5.50%. The market was surprised that the RBNZ maintained its OCR peak at 5.50%, and the NZ government bond curve has not further inverted. The RBNZ remains hawkish and continues to surprise the market on the hawkish side. The forecast peak in the OCR has been pushed back by one quarter to Q4, and rate cuts may be considered by the RBNZ after Q224. The RBNZ believes that the economy is currently being supported by strong domestic consumption and household balance sheets, a rapid recovery in tourism, and public and private construction. The recent cyclone and floods in the North Island are expected to add to short-term inflation pressures via supply-side pressures and, in the medium-term, support construction activity. The RBNZ will be watching how the government finances reconstruction spending. The RBNZ decided to hike rates by 50bp instead of 75bp as recent easing in upside inflation risks meant the Monetary Policy Committee (MPC) could hike by 50bp.

AUD: Where’s the Wages Growth?

Australia’s wages growth accelerated from 3.1% YoY to 3.3% YoY in Q4, but it was significantly less than the 3.5% YoY expected by the RBA. Despite the unemployment rate being close to 50-year lows, Australia continues to lack the wage-price spirals that are being experienced in the US, Canada, the UK, and NZ. This lack of a wage-price spiral is leaving the RBA trailing other G10 central banks in terms of rate hikes and is dragging on the AUD. Moreover, the modest acceleration in wages growth comes at a time when Australia's labor market is beginning to develop slack. The labor market has seen its first two consecutive MoM declines in employment since the omicron wave of Covid in late 2021, increasing the importance of the February labor market data.

RBA Governor Philip Lowe and Assistant Governor of Economic Group Luci Ellis have both acknowledged that further weakening would lead the central bank to reassess its economic outlook. The Australian private-sector CAPEX data released on Thursday will also be essential for the RBA's economic outlook and the AUD. The RBA is assuming a strong pipeline of private-sector investment will help push the economy forward in the coming year, despite higher rates. Investors will be focused on investment spending for Q4 as well as the outlooks for fiscal years 2022/2023 and the first reading for investment intentions in fiscal year 2023/2024.

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