AUD to USD Forecast: RBA Forward Guidance and Fed Chatter Influences

Economic

Forex

Summary:

On Wednesday (May 8), the RBA Chart Pack release could influence buyer demand for the AUD/USD.Following the RBA monetary policy decision and press conference, investors should also consider upcoming data from Australia and China.

The RBA, the Australian Labor Market, and China

On Wednesday (May 8), market risk sentiment will likely influence buyer demand for the AUD/USD early in the session.

However, the AUD/USD may remain under pressure due to the less hawkish-than-expected RBA press conference. On Wednesday, the RBA will release its chart pack, which provides investors with graphics of the Australian economy and financial markets.

During the RBA press conference, RBA Governor Michele Bullock discussed tight labor market conditions, household income, and the sticky inflation environment. The graphics will likely illustrate the balancing act the RBA faces. On the one hand, the RBA needs to bring inflation down, but on the other, the RBA wants to avoid adversely impacting the labor market.

Later this week, economic indicators from China will influence sentiment toward the global macroeconomic environment. On Thursday, trade data from China will provide a snapshot of the demand environment. RBA staff consider the Chinese economy in their forecasts. An improving demand environment could be another challenge for the RBA to face in combating inflation.

However, investors must wait until next week for the next round of Australian wage growth and unemployment figures. Deteriorating labor market conditions could prompt a reassessment of the RBA’s wait-and-see strategy.

US Economic Calendar: FOMC Member Speakers in the Spotlight

Later in the Wednesday session, investors should monitor FOMC member speeches. FOMC members Philip Jefferson, Susan Collins, and Lisa Cook are on the calendar to speak.

Views on inflation, the labor market, the economic outlook, and the timing of a Fed rate cut need consideration.

Recent speeches have impacted investor expectations of a September Fed rate cut. Minneapolis Fed President Neel Kashkari released a hawkish new essay on Tuesday (May 7), suggesting a possible need for a Fed rate hike. While the US Jobs Report was weaker than expected, inflation remains the bugbear.

According to the CME FedWatch Tool, the chances of the Fed leaving interest rates unchanged in September increased from 34.3% to 35.5% on Tuesday (May 7).

Short-Term Forecast

Near-term AUD/USD trends will hinge on trade data from China and FOMC member speeches. A more hawkish Fed could tilt monetary policy divergence toward the US dollar. RBA Governor Michele Bullock poured cold water on speculation about an RBA rate hike. The status quo would leave interest rate differentials stacked against the Aussie dollar.

AUD/USD Price Action

Daily Chart AUD to USD Forecast: RBA Forward Guidance and Fed Chatter Influences_1

The AUD/USD hovered above the 50-day and 200-day EMAs, sending bullish price signals.

An Aussie dollar return to the $0.66500 handle would support a move toward the $0.67003 resistance level.

The RBA chart pack and FOMC member speeches need consideration.

Conversely, an AUD/USD break below the $0.65760 support level and the 200-day EMA could give the bears a run at the 50-day EMA. A fall through the 50-day EMA would bring sub-$0.65 into view.

With a 14-period Daily RSI reading of 56.76, the AUD/USD may move to the $0.67003 resistance level before entering overbought territory.

Source: FX Empire

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Alex

Economic

A top official with the International Monetary Fund (IMF) has lamented the economic fallout from years of strained relations between China and the West, and warned the situation for the world economy would only grow more dire if the acrimony continues unabated.

With the world now divided among three broad blocs of countries – China-leaning, US-leaning, and nonaligned – both a “significant reversal of the gains from economic integration” and “a broad retreat from global rules of engagement” are on the horizon, said Gita Gopinath, the first deputy managing director of the financial agency.

Gopinath, who has often led annual audits of China’s financial system, made the remarks in a speech at Stanford University on Tuesday.

Her remarks come at a time of increased geopolitical uncertainty over a number of challenges, most notably an escalating rivalry between the US and China and the war in Ukraine.

Although economic fragmentation is not yet as severe as it was during the Cold War, Gopinath said, it carries a much greater potential cost thanks to higher global reliance on trade.

China’s share of US imports fell by 8 percentage points between 2017 and 2023 as trade and overall relations between the two countries fragmented, while the US’ share of China’s exports fell by about 4 percentage points during the same period.

Trade between blocs of countries aligned with either China or the US was also negatively affected, Gopinath said.

Between the middle of 2022 and 2023, the average weighted quarter-on-quarter trade growth between US-leaning countries and China-leaning countries fell by nearly five percentage points compared with the five-year period between 2017 and early 2022.

Similar patterns could also be observed following Russia’s invasion of Ukraine, with trade and investment between blocs falling more than trade within blocs.

Meanwhile, the currency composition of trade finance had also changed more for China-leaning countries than US-leaning ones, according to Gopinath. The proportion of US dollar-denominated trade finance payments among China-leaning countries fell since early 2022, while the yuan-denominated share doubled from around 4 to 8 per cent. US-leaning countries experienced little change.

This would persist even if Russia was excluded from the China-leaning bloc, she said, indicating a more globally pervasive trend.

Gopinath’s speech coincided with President Xi Jinping’s first diplomatic visit to Europe in five years – with stops scheduled in France, Serbia and Hungary – to mitigate alarm over China’s economic ambitions and its close ties to Russia.

High-level dialogues between Beijing and the West have increased in recent months, as top officials try to repair relations tested by years of wrangling over national security concerns, allegations of anticompetitive behaviour and China’s support for Russia in the wake of its invasion of Ukraine and the numerous Western sanctions that followed.

Foreign direct investment into China has suffered, with flows over January to March this year totalling only 301 billion yuan – a 26 per cent year-on-year drop, according to official data released last month.

Despite Beijing’s attempts to woo back foreign investors, many international companies remain wary, citing China’s economic slowdown and ongoing geopolitical tussles.

A survey from the American Chamber of Commerce in China released in February found that nearly half of the respondents did not plan to expand investment in China. A separate survey from the European Chamber of Commerce in China in June found that 11 per cent of respondents had already shifted investments out of China, with a further 8 per cent moving investments planned for China to other destinations.

So far, the erosion of direct US-China economic ties has been allayed through third-party “connector countries” like Mexico and Vietnam, which have become conduits for redirecting trade, Gopinath said.

But the cost of worsening divisions could vary greatly, she added, with losses ranging from as little as 0.2 per cent of world GDP in a mild scenario to 7 per cent in an extreme one.

The consequences of such a downturn would not be suffered uniformly, with the IMF predicting low-income countries would be hit harder by trade fragmentation due to a greater reliance on agricultural imports and investment from more developed countries.

Going forward, “pragmatic steps” would need to be taken to rebuild trust, Gopinath said, starting with countries keeping open lines of communication.

“Dialogue between the US and China – which we are now seeing – can help prevent the worst outcomes from occurring. Non-aligned countries can also play a bigger role, using their economic and diplomatic heft to keep the world integrated,” she said.

Others have been less hopeful in their projections. A separate report, released on Tuesday by the Economist Intelligence Unit, predicted that economic and diplomatic ties between China and the US will worsen through the rest of the decade, regardless of the outcome of the US presidential elections in November.

Source：scmp

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Kevin Du

Economic

Stocks

US Equity Markets: FOMC Member Commentary and Economic Sentiment

On Tuesday (May 7), the RCM/TIPP Economic Optimism Index drew investor interest following the US Jobs Report and ISM Services PMI survey.

The Index decreased from 43.2 to 41.8 in May, signaling a more pessimistic outlook for the US economy. However, FOMC member speeches also captured investor attention amid fluctuating expectations for a September Fed rate cut.

FOMC member Neel Kashkari released an essay on monetary policy and inflation with a hawkish spin.

On Tuesday (May 7), the Nasdaq Composite Index declined by 0.10%. The Dow and the S&P 500 ended the session up 0.08% and 0.13%, respectively.

Fed speakers and the US equity market movements will likely set the tone for the Wednesday (May 8) Asian session.

Asian Economic Calendar: Stock Investments by Foreigners and Corporate Earnings

On Wednesday (May 8), foreign investments into Japanese stocks will draw investor interest. Upward trends in investment by foreigners could drive buyer demand for Nikkei-listed stocks.

In the week ending April 20, foreign investments in Japanese stocks declined by ¥492.4 billion.

Beyond the numbers, investors should also consider central bank commentary, which influences market risk sentiment.

Furthermore, corporate earnings also warrant investor attention. Mitsubishi Motor Corp. (7211), Yamaha Corp. (7951), Manulife Financial (HK: 0945), and Wesfarmers (ASX: WES) are among the big names to release earnings results.

Commodities: Crude Oil, Gold, and Iron Ore

On Tuesday (May 7), gold spot (XAU/USD) fell by 0.42% to close the session at $2,314.10. WTI crude oil declined by 0.13%, ending the day at $78.38.

On the Singapore Futures Exchange, iron ore prices were down 0.03% on Wednesday (May 8). Iron ore spot fell by 1.16% on Tuesday (May 7).

The USD/JPY and the Nikkei

The USD/JPY increased by 0.54% on Tuesday (May 7), closing the session at 154.691. USD/JPY trends may influence buyer appetite for Nikkei 225-listed export stocks. A weaker Yen could support export stocks.

The Futures Markets

On Wednesday (May 7), the ASX 200 was up 14 points, while the Nikkei 225 was down by 180 points.

ASX 200

The ASX 200 rallied 1.44% on Tuesday (May 7). Gains were broad-based for the second successive session, with the S&P/ASX All Tech Index advancing by 1.62%. A less hawkish-than-expected RBA drove buyer demand for ASX 200-listed stocks.

Commonwealth Bank of Australia (CBA) and Westpac Banking Corp. (WBC) rallied 2.07% and 2.84%, respectively. ANZ Group Holdings Ltd. (ANZ) gained 0.07%, with National Australia Bank Ltd. (NAB) rising by 0.95%. ANZ lagged the broader market after a profit miss.

BHP Group Ltd (BHP) and Rio Tinto Group Ltd. (RIO) ended the session up 1.57% and 1.57%, respectively. Fortescue Metals Group Ltd. (FMG) advanced by 1.75%.

Gold-related and oil stocks also had positive sessions.

Gold-related stocks Northern Star Resources Ltd. (NST) and Evolution Mining Ltd (EVN) rose by 1.17% and 1.61%, respectively.

Woodside Energy Group Ltd (WDS) and Santos Ltd (STO) increased by 1.87% and 0.94%, respectively.

Hang Seng Index

The Hang Seng Index declined by 0.53% on Tuesday (May 7). Tech stocks dragged the HSI into the red, with the Hang Seng Tech Index (HSTECH) sliding by 2.13%. However, real estate stocks limited the downside. The Hang Seng Mainland Properties Index (HSMPI) gained 0.75%.

Alibaba (9988) and Tencent (0700) fell by 1.82% and 1.19%, respectively.

However, bank stocks had a positive session. HSBC (0005) advanced by 0.72%. China Construction Bank (0939) and Industrial Commercial Bank (1398) saw gains of 0.38% and 0.47%, respectively.

The Nikkei 225

Hang Seng Index, ASX 200, Nikkei 225: Fed Speeches and Corporate Earnings_3

The Nikkei 225 reopened after a two-day holiday, rallying 1.57% on Tuesday (May 7).

Bank stocks had a positive start to the week. Sumitomo Mitsui Financial Group Inc. (8316) and Mitsubishi UFJ Financial Group Inc. (8306) rose by 0.42% and 0.32%, respectively.

However, it was a mixed session for the main components of the Nikkei 225.

Tokyo Electron Ltd. (8035) and Softbank Group Corp. (9948) surged 5.23% and 3.66%, respectively. Fast Retailing Co. Ltd. (9983) ended the session up 3.16%.

However, Sony Group Corporation (6758) slid by 2.91% over investor concerns about a bid to acquire Paramount Global. KDDI Corp. (9433) declined by 1.00%.

For upcoming economic events, refer to our economic calendar.

Source: FX Empire

To stay updated on all economic events of today, please check out our Economic calendar

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Samantha Luan

Economic

JPMorgan Chase & Co.’s Nelson Jantzen has a calming notion for investors alarmed by the US corporate default rate rising to almost 6% by one calculation.

About half the volume of corporate debt included in the default rate in one measurement isn’t wholly a problem for investors, at least not now. In another analysis, the speculative-grade default rate is actually closer to about 3% at the end of March, according to Jantzen, a head of US high yield and leveraged loan strategy.

The difference stems from what happens when a company tries to avoid bankruptcy by entering a distressed debt exchange. Such a swap can result in all of a company’s debt counting as having defaulted according to an issuer-weighted metric widely used in the industry.

But a distressed debt exchange may not translate to a company failing to make all its interest payments. In a par-weighted measure, debt used in a distressed exchange is included but only the amount that was actually swapped.

“A lot of the confusion is around the absolute numbers being reported because people aren’t necessarily feeling it to that effect in their portfolio,” Jantzen said in a telephone interview.

Distressed debt exchanges are becoming popular as a way for troubled companies to preserve the value of their bonds and loans by extending maturities on specific obligations, usually with the holders agreeing to take a haircut, or reduced price. While such swaps still represent events of default, investors are betting on a better return than if the borrower tried another workout route, such as filing for bankruptcy.

More than 50% of the default volume in the first quarter included a distressed debt exchange, compared to around 30% in 2023, according to JPMorgan data.

Moody’s Method

At Moody’s Ratings, the company that for more than a century has set creditworthiness standards on Wall Street, analysts say the US default rate hit 5.8% at the end of March, a level not seen since 2021.

That’s an issuer-weighted calculation, which includes the likelihood that bond and loan covenants will spur accelerated payments on all debt when an issuer defaults. This approach counts a distressed exchange as equivalent to a bankruptcy or default.

“Our default rate will be a little more elevated,” said Julia Chursin, vice president of the corporate finance group at Moody’s. “But if you exclude distressed exchanges, you are omitting a large chunk of the market.”

The gap in the default rate shown by the two methodologies is the highest on record, according to JPMorgan. Some portfolio managers say they’ve had to explain why to investors.

“That’s a pretty material difference,” said Joe Lynch, global head of non-investment grade credit at Neuberger Berman. “There are a lot of implications for how investors look at these metrics.”

S&P Global Ratings estimates the first-quarter default rate at 4.8%, while Fitch Ratings reports separate metrics by volume and by count for high-yield bonds and leveraged loans. Moody’s also reports a par-weighted default rate but only for high-yield bonds.

Investor Preference

Most investors tend to prefer par-weighted calculations because they reflect real losses on returns, rather than the number of companies that had a default, according to Michael Best, portfolio manager at Barings.

“You can have small bad companies default for any number of reasons,” he said. “If you have a name that’s held by everybody default, that matters more to investors in larger corporate fixed income.”

To be sure, any one measurement of the rate at which companies are defaulting will offer an incomplete picture of corporate stress. The rise of distressed debt exchanges has also come with more companies defaulting multiple times and ultimately filing for bankruptcy, even after restructuring their debt at least once.

And that also means diminishing recoveries, especially when those distressed debt exchanges pit lenders against each other. A benign default rate could still translate to more losses for lenders if recoveries plunge.

“You’re seeing different recoveries in the same lender class,” said Samantha Milner, a partner and US liquid credit portfolio manager at Ares Management. “So how do you avoid or minimize the defaults, and then maximize the recoveries?”

Whichever methodology investors embrace in assessing the overall risk of more defaults, Moody’s has what may be welcome news. The ratings firm expects their calculation of the default rate peaked in the first quarter and will moderate to the mean of around 4.7% by June.

Taking note of the par-weighted metric, JPMorgan in a note on Tuesday said that “default rates on HY bonds and loans remain low despite two years of increasingly restrictive Fed policy.”

Even an anticipated delay of a few months by the central bank in cutting rates “is unlikely to materially change the trend in corporate credit metrics,” JPMorgan said.

Source：Bloomberg

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Cohen

Economic

Political

Cargoes of an oil product from Russia are building up at sea as South Korean buyers turn cautious, highlighting how the invasion of Ukraine is still impacting flows more than two years later.

More than 2 million barrels of Russian naphtha, a building block for plastics, have been held in 10 tankers for more than a week, with some in the waters near Oman and Malta, as of May 7, according to market intelligence firm Kpler. That’s up from a weekly average of about 790,000 barrels in January and February.

Russian Oil-Product Stranded At Sea As Korea Cracks Down_1

Petrochemical makers in South Korea — traditionally major buyers of the Russian product — are now shunning direct imports, and any cargoes with unclear origins, for fear of government scrutiny, according to traders with knowledge of the matter who asked not to be identified. That follows the launch in March of an investigation into naphtha imports by the country’s authorities.

Global energy markets — for crude oil, natural gas, and petroleum products — were upended by the invasion in early 2022 as some buyers shunned exports, flows were rerouted, and a web of western sanctions and price caps brought an extra layer of complication. Like most import-dependent economies, South Korea, and its refiners and plastics makers, have been forced to adapt.

Before the assault on Kyiv, Russia was South Korea’s top naphtha supplier. While direct flows dwindled after the war began, imports from nations such as United Arab Emirates, Malaysia, Singapore and Tunisia swelled, according to Kpler data. In March, however, South Korean authorities launched the probe to examine whether naphtha from Russia was being re-labeled.

Since then, imports from Mideast suppliers — such as Kuwait and Oman — have risen, according to Viktor Katona, an analyst at Kpler. At the same time, Russian naphtha flows to China and Taiwan have expanded, Katona said, noting shipments from Moscow accounted for more than half of Taiwan’s imports in April.

While South Korean refiners and petrochemical companies are allowed to import naphtha from Moscow, they need to comply with a Group of Seven price cap that bars access to western services if cargoes cost more than certain levels. Seoul isn’t a part of the G-7 but it has supported measures that the group imposed in an effort to punish Russia for the war.

Source：Bloomberg

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Alex

Economic

Bond

ICRA, a credit rating agency, forecasts that the growth of new loans (incremental credit flow) in the Indian economy will slow down in the financial year 2025 (FY2025), while bond issuances are expected to rise to Rs 10.6 trillion in FY2025 from Rs 10.2 trillion in FY2024.

Why bonds are suddenly attractive?

While the overall growth of new credit in the Indian economy might slow down in FY2025, the bond market is expected to pick up the slack. Companies are likely to take advantage of attractive domestic interest rates and favorable conditions to raise money by issuing bonds.

As interest rates remain high in developed countries, borrowing money domestically through bond issuance becomes a more attractive option for Indian companies.

If the yield on Indian Government Bonds (IGBs) remains stable due to foreign investment, the competitiveness of bond issuance compared to bank loans is expected to improve. This could incentivize companies to issue more bonds.

Here's a breakdown:

Source of credit: The slowdown in bank credit is expected to be primarily from domestic sources, which are likely to provide Rs 24.5 trillion in new loans in FY2025. This is lower than the record high achieved in FY2024

Non-Food Bank Credit (NFBC): This refers to loans provided by banks for purposes other than agriculture. ICRA expects NFBC growth to also moderate slightly in FY2025 compared to the record high of FY2024.

Bond market to pick up slack

Corporate Bond issuances: ICRA predicts that even though overall credit growth might slow down, companies will increasingly turn to issuing bonds to raise money. This is likely due to:

Attractive Interest Rates: Interest rates are expected to remain high in developed countries. This makes borrowing money domestically in India (through bond issuance) a more attractive option for large companies.

Favorable conditions: ICRA expects conditions for issuing corporate bonds to remain positive for both companies issuing bonds (borrowers) and investors buying them.

The total value of all corporate bonds currently issued (outstanding) is expected to reach RS 50.3 trillion by the end of March 2025. This represents a YoY (Year-over-Year) growth of 9.5%.

"Competitive funding conditions in domestic markets compared to developed markets meant that large corporates tapped more domestic funding sources over the last two years. Strong demand for loans from retail borrowers and non-bank finance companies (NBFCs) drove a significant portion of the incremental flow of credit from banks. This resulted in the highest ever NFBC expansion of Rs 22.3 trillion in FY2024 far outpacing the incremental NFBC expansion of Rs. 18.2 trillion recorded in FY2023," noted ICRA in a note.

The incremental credit flow was also supported by the all-time high corporate bond issuances of Rs 10.2 trillion in FY2024 (YoY +16.9%), resulting in the stock of corporate bonds outstanding rising to an estimated Rs 46.0 trillion (+6.6% YoY) as on March 31, 2024, from Rs. 43.1 trillion as on March 31, 2023.

Domestic bond issurances

Besides, the stock of commercial papers (CPs) outstanding also rose by Rs 0.4 trillion in FY2024 to Rs. 3.9 trillion as on March 31, 2024. Cumulatively, these three sources accounted for Rs. 25.4 trillion of incremental credit flow in the domestic market, an all-time high.

Headwinds for bank lending:

Regulatory actions: Recent regulations on unsecured loans (personal loans without collateral) and limitations on bank funding for NBFCs (Non-Banking Financial Companies) might restrict the growth of new loans offered by banks. Reduced availability of cash in the banking system could further limit banks' ability to provide new loans.

However, the yield on Indian Government Bonds (IGBs) is likely to remain range-bound, driven by demand from foreign portfolio flows upon inclusion of IGBs in global indices. This shall improve the competitiveness of funding from debt capital markets vis a vis bank borrowing and would drive up corporate bond issuances, said ICRA.

“Growth is expected to eventually taper off from these levels on the back of tight liquidity, even as the foreign flows in IGBs will remain supportive for growth in corporate bond issuances. Accordingly, ICRA estimates incremental total credit (bonds, non-food bank credit and CPs) expansion to dip to Rs. 24.5 trillion in FY2025,” said Sachin Sachdeva, Vice President & Sector Head, ICRA.

Source：Business Standard

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Owen Li

Economic

Although there are signs of a slight upturn in the global economy, companies are not benefiting from it enough because of political uncertainty and geopolitical risks, the Chamber's regular AHK World Business Outlook suggested.

"The weak development of German foreign trade at the turn of the year and the slight improvement in business expectations and investment intentions point to a challenging year, despite small rays of hope," Volker Treier, DIHK head of foreign trade, said.

The German economy is highly trade-oriented and therefore sensitive to international events that weaken foreign demand.

German companies with activities abroad were increasingly optimistic about global economic developments, the DIHK survey showed.

Of the 4,300 companies surveyed, 31% expected an economic upturn at their overseas locations in the current year, boosted by slowing inflation rates and the hope of interest rate cuts.

In the last survey in November, the figure was 22%.

One in five companies still anticipated an economic slowdown, compared with 28% in the previous survey.

"There are signs of an upturn on many global markets. This gives many companies hope that the mood will improve again," Treier added.

"However, the improved economic expectations are not yet materialising in an equally strong revival in international trade - and therefore also in the business of German companies locally," he added.

EXPECTATIONS DETERIORATE IN CHINA

While companies were more upbeat about their foreign-based operations, their expectations for China deteriorated once again.

The continuing weak demand in the Chinese economy was seen as a business risk by 80% of the companies.

"The increasing competitive disadvantages compared to Chinese firms, particularly in terms of market access, contacts with authorities or in obtaining information for public tenders represent a burden for German companies," Maximilian Butek, chief representative at the DIHK delegation in Shanghai, said.

Companies were more optimistic about business opportunities in other parts of the Asia-Pacific region, which remains an important destination for the diversification of supply chains.

Firms had not seen any improvement in their situation in the eurozone from November and business expectations for the coming twelve months remained below the global average, according to the survey.

In the U.S., companies are much more concerned about uncertain economic policy conditions and, above all, trade barriers that could start in November.