Fed Reserve Members Maintain More Hikes Required
AUD
AUD trades largely higher against its counterparts, despite the confirmation that policymakers will keep tightening monetary conditions continuing to take its toll on global sentiment. Asian equities were higher on the close with the Hang Seng the star performer up 1.8%. The ASX finished Friday’s session up 0.2%, ending the week at a 9-month high. A mixed session in commodities, with Gold losing out -0.3%, Silver gained 0,4%, Iron Ore was flat, and Copper advanced 1.1%. The coming week will be relatively quieter in Asia as Chinese markets will be closed for the Lunar New Year celebrations. But for the antipodean currencies, there should be plenty of excitement from the incoming CPI data. The Aussie will also be keeping an eye on the flash PMIs and business confidence figures on Tuesday. The domestic focus will be the Australian and New Zealand Q4 inflation data due for release on Wednesday. For Australia, strong outcomes for both headline and underlying inflation appear likely. We expect Q4 headline CPI inflation to have been +1.5% q/q and +7.5% y/y (quarterly forecast rounds down to 1.5% q/q). If there is a further deterioration in December and for the fourth quarter as a whole, investors are likely to increase their bets of a 25-bps rate rise at the February meeting from the current odds showing it’s a coin toss between a hike and keeping rates unchanged.
USD
AUDUSD trades higher this morning, having reached 4-day-highs of 0.6973 before correcting slightly, trading at 0.6974 at time of writing. Financial markets are still trying to decide where to go next. In the United States, inflationary pressure had receded sharply, confirmed these days by the Producer Price Index (PPI), which rose at an annualized pace of 6.2% in December, easing from 7.3% in the previous month. Softening inflation means the US Federal Reserve (Fed) does not need to continue with the aggressive monetary tightening to tame prices. Higher borrowing costs are a consequence of such a monetary policy, and hence, economic growth tends to slow. However, several United States Fed policymakers hit the wires with hawkish stances that suggested the central bank would maintain its current path. St. Louis Federal Reserve's President James Bullard said US interest rates have to rise further to ensure that inflationary pressures recede. Also, Fed's Loretta Mester, president of the Federal Reserve Bank of Cleveland, welcomed actions to tame inflation, while Fed's Esther George said that the central bank must restore price stability, "that means returning to 2% inflation."
EUR
AUDEUR trades higher this morning, also having touched 4-day-highs of 0.6423 before opening on the backfoot this morning, trading at 0.6393 at time of writing. European stocks closed in the green on Friday with CAC and DAX both up 0.7%. In Friday's data, German PPI (producer prices) for December decreased by 0.4% which was only about one third of the decline expected showing that some price relief is evident albeit not at the pace that is expected. Looking ahead, the data for the week kicks off tomorrow night with French and German Flash and Services Manufacturing PMI’s out of the Eurozone.
GBP
AUDGBP trades higher this morning, following suit of its counterparts and reaching 4-day-highs of 0.5624 before declining, however managing to hang onto the 0.56 handle, trading at 0.5614 at time of writing. It could be said that the United Kingdom is in a very similar boat as the Eurozone but not quite. The odds of the British economy dodging a recession are somewhat lower and even if some of the gloom around the UK and sterling has been overdone, Brexit and the political chaos have seriously dented the outlook for the country. Retail Sales m/m was released out of the UK on Friday, and Retail Sales volumes are estimated to have fallen by 1.0% in December 2022, following a fall of 0.5% in November (revised from a fall of 0.4%). Sales volumes were 1.7% below their pre-coronavirus (COVID-19) February levels. Non-food stores sales volumes fell by 2.1% over the month, with continued feedback from retailers and other wider evidence that consumers are cutting back on spending because of increased prices and affordability concerns. The flash January PMIs are due on Tuesday and investors will be looking out for an uptick in both the services and manufacturing prints. On Thursday, the producer price index for December might also attract some attention.
NZD
AUDNZD trades lower this morning, bucking the trend of its counterparts and reached an inverse result of 4-day-lows at 1.0742 before recovering slightly to trade at 1.0765 at time of writing. As for the kiwi, it’s likely to benefit more substantially from stronger-than-expected CPI prints as investors have priced in about a 25% chance of a bigger 75-bps rate increase by the Reserve Bank of New Zealand at its February gathering. The RBNZ’s cash rate is seen peaking well above 5% and at the current level of 4.25%, the bank could be hiking long after its peers have paused, so any upside surprises are likely to boost the local dollar.