Market Update 27/08/2024

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A soft start to the week on Wall St. saw the Nasdaq close down 0.9% and the S&P 500 down 0.3%. U.S. 10-year yields edged slightly higher, while simmering tensions in the Middle East pushed crude oil up 3.1% to $77.10 a barrel. AUD/USD traded within a narrow range of 0.67675 to 0.6798. The USD remained strong into the London session as Brent crude rallied above $81 per barrel. The antipodeans fell to 0.67675 and 0.61975, while EUR/USD and GBP/USD slid lower to 1.11635 and 1.3183, respectively. USD/JPY climbed back above 144.00, reaching a high of 144.23.

At the NY open, July Durable Goods Orders rose by 9.9%, up from a 6.9% decline and well above expectations of a 4.9% increase. However, the core measure fell by 0.2%, against expectations of a flat result. The USD moved marginally higher in response, with EUR/USD slipping to a low of 1.1150 and GBP/USD falling to 1.3181 later in the NY morning. USD/JPY also rose to a high of 144.46, while USD/CAD moved in the opposite direction, slipping to a low of 1.3464 during the London rate set.

Fed’s Daly commented that it was time to adjust policy, though it was too early to determine how large rate cuts could be. He added that the most likely outcome was a continued gradual slowing of inflation and a more sustainable labor market. There was little reaction to these headlines, with markets remaining very subdued over the NY afternoon. USD/JPY briefly hit a new high of 144.65, though other majors traded in small ranges ahead of the Sydney open, with the local unit near 0.6775.

■ AUD/USD traded in a tight range around 0.6780 overnight. There is no important local economic data until tomorrow’s monthly CPI indicator for July. As such, AUD/USD will take its cue from the USD and global equity markets today. Concerns over oil supply disruptions are a downside risk to the risk sensitive AUD/USD in our view.  

■ USD edged slightly higher against the major currencies we cover overnight. US Treasury yields rose by 1bp‑2bp across the curve. US equities were mixed. Brent oil futures jumped by more than 2% after Libya’s eastern government said it will halt all oil production and exports. Oil prices had already lifted earlier in response to hopes of FOMC interest rate cuts and an Israeli pre‑emptive airstrike on Hezbollah missile launchers in southern Lebanon. Concerns over oil supply disruptions are an upside risk to oil prices and the safe haven currencies such as the USD and JPY.  

Notwithstanding, risk sentiment remains relatively healthy and financial conditions in the US have loosened. The looming FOMC interest rate cutting cycle can cause financial conditions in the US to loosen further. Read Chart of the day. US PCE inflation for July released later this week will cement expectations the FOMC will pivot to interest rate cuts at its next meeting in mid‑September. It will take a large increase in core PCE inflation to prevent the FOMC from starting an easing cycle in September in our view.  

■ AUD/EUR pared earlier losses to be near 0.6065. The German Ifo business climate index declined for a third consecutive month to just 86.6pts in August, the lowest since February 2024. The decline in the headline index was driven by both current assessment and expectations. The weakness in the German economy has contributed to the Eurozone’s stagnation over the past two years.  
 
ECB officials Klaas Knot (8:45pm Sydney time) and Joachim Nagel (midnight Sydney time) speak tonight. Their comments will be closely watched if the ECB is on track to cut interest rates again at its next meeting in September. ECB chief economist Philip Lane said at the Jackson Hole symposium over the weekend that the return of inflation to target is ‘not yet secure’. Lane’s comments suggest the ECB is unlikely to lower interest rates at every meeting. Despite the ECB’s potentially cautious easing cycle, the RBA’s relatively hawkish policy stance means AUD/EUR will stay supported in our view.  

■ AUD/CNH consolidated around 4.8250. Yesterday the PBoC left the one year Medium Term Lending Facility (MLF) rate steady at 2.3%. The PBoC’s decision was widely expected because it had left the 7 day reverse repo rate unchanged so far this month.  The PBoC has signalled it would like to replace the one year MLF rate with the 7 day reverse repo rate as the key policy rate. Given lacklustre economic activity in China, the PBoC is not done with cutting interest rates in our view. And with the FOMC set to pivot to an easing cycle soon, we expect another round of PBoC rate cuts to come as soon as next month. The prospects of additional PBoC easing and a soft Chinese economy will help put a floor under USD/CNH in our view.
 


Mid market rates.

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