Australian Dollar Forecasts Lowered at CBA

Economic

Forex

Summary:

Commonwealth Bank of Australia has lowered its forecasts for the Australian Dollar against the Dollar and Pound, but holds onto its view that the "next big move" in the Aussie will "be up rather than down".

"We tweak our currency forecasts following our updated central bank views and changes in commodity prices," says Joseph Capurso, Head of International and Sustainable Economics at CBA.

The Dollar is seen to have peaked but is expected to prove resistant to a major selloff that would typically boost Australian Dollar exchange rates. Previously, the pace of decline was expected to be faster, which meant the major Aussie exchange rates had more upside potential in 2024/2025.

Still-high U.S. bond yields are seen supporting the Greenback for a while longer, on account of the Federal Reserve's likely reluctance to cut interest rates owing to signs inflation is taking its time to fall back to target.

"We consider AUD/USD can lift modestly rather than strongly over the next year. One obstacle to large gains in AUD/USD is the large negative interest rate differential between Australia and the U.S.," says Capurso.

Analysts at CBA still maintain a view that the Australian Dollar is "well past" its cyclical lows and "we expect the next big move in AUD/USD will be up rather than down."

An improving global economic backdrop is expected to be a key driver of Aussie upside, including a Chinese revival. Analysts note Hong Kong’s Hang Seng equity index - a proxy for the Chinese economy - is already pointing to such a recovery.

Downside risks to the Aussie Dollar would be another Federal Reserve rate hike and the re-election of Donald Trump as U.S. President, as CBA thinks any wage tensions between the U.S. and China will weigh.

The Reserve Bank of Australia is meanwhile considered a potential upside risk.

"One upside risk to our AUD/USD forecasts is if the Reserve Bank of Australia (RBA) increases the cash rate. Until recently, financial markets were partially pricing a rate hike by the RBA before the end of the year. While we disagree with the argument for rate hikes based on our economic forecasts, if we are wrong and the RBA increases the cash rate at least once, AUD/USD could be higher than our new forecasts," says Capurso.

A number of investment banks had raised expectations that the RBA would hike interest rates again owing to surprisingly strong quarter-1 inflation.

However, the RBA's May update showed the bar to such a move was set particularly high, resulting in a paring of rate hike expectations and a softening in the AUD.

The next near-term trigger for AUD comes in the form of next week's all-important U.S. inflation release, where an undershoot against expectations can provide a boost for this pro-cyclical currency.

CBA now forecasts AUD/USD to end 2024 at 0.69, down from 0.71 previously. 0.71 is now pencilled in for March 2024, down from 0.73 previously.

For the AUD/GBP exchange rate, the new forecast is 0.5391 at year-end, down from 0.5462. The March 2025 forecast is 0.5462, down from 0.5530 previously.

This translates into a Pound to Australian Dollar forecast of 1.8550 and 1.83.

Source: Poundsterlinglive

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Kevin Du

Economic

Bond

What's more, if the benign "soft landing" or "no landing" economic forecasts on which the already scary U.S. budget math is predicated fail to play out, the Federal Reserve may ultimately be forced to start buying bonds again.

The Treasury market is at a delicate juncture. Federal annual budget deficits over the next several years are projected to run into the trillions of dollars, and will need to be funded by increasingly wary lenders.

The risk is that the deficit and borrowing outlook is even more challenging than it looks, because these projections are based on macroeconomic forecasts that may turn out to be too optimistic.

Take the unemployment rate, currently at 3.9%. The non-partisan Congressional Budget Office's baseline scenario is for unemployment to rise to 4.2% this year, 4.5% in the following year, dip back to 4.3% in 2026, average 4.4% over the next two years and then average 4.5% over the five-year period through 2034.

History shows, however, that recessions are accompanied by far steeper rises in unemployment than that. Every recession in the past half century has been associated with unemployment rising at least two percentage points, usually more.

The fall in tax revenues and rise in benefits spending from an adverse shock of that nature would almost certainly widen deficits further and force Washington to issue more debt, resulting in higher bond yields.

Just how high would in part be determined by demand. But to be sure of keeping long-term borrowing costs under control the Federal Reserve may have to step in, U-turn on its balance sheet reduction drive, and resume full-on quantitative easing.

"The risk that the Fed monetizes excessive deficits in the next five to 10 years has to be taken seriously," says Willem Buiter, a former rate-setter at the Bank of England, adding that a return to something akin to permanent QE is "quite likely."

"But the Fed should be reducing its balance sheet significantly, and not be the buyer of first resort," Buiter notes.

No economic indicator moves the bond market more than jobs and inflation data. As Alex Etra at Exante Data notes, most of the increase in nominal bond yields over the last 18 months has been around non-farm payrolls and consumer price index and personal consumption expenditures inflation reports.

DEFICITS AND TERM PREMIUM

The CBO's baseline projections show the U.S. budget deficit widening to 6.1% of gross domestic product next year and not shrinking below 5% for the next decade.

In dollar terms, that's an annual shortfall of between $1.64 and $2.56 trillion every year for the next decade that the government has to plug, mostly through borrowing.

The annual U.S. budget balance is almost always in deficit, but rarely this deep - between World War Two and the Great Financial Crisis it exceeded 5% of GDP only once, in 1983.

International Monetary Fund estimates for the "general government fiscal balance" show the annual deficit out to 2029 even wider, from 6.0% to 7.1% of GDP.

In its "Fiscal Monitor" update in April the IMF warned that the U.S. Treasury's plans to issue more debt, coinciding with quantitative tightening, has probably fueled the recent increase in bond market volatility and rise in term premiums.

Term premium is the extra compensation investors demand for lending to the government over the long term instead of rolling over shorter-term loans. Rising term premiums are a reflection of higher risk aversion, and negative budgetary shocks are a prime source.

"Empirical evidence suggests that all else being equal, a 1 percentage point increase in the U.S. primary deficit is associated with a rise in term premiums of about 11 basis points in the quarters that follow," IMF economists found.

A rising term premium may also reflect changes in the make-up of demand for Treasuries, as "price-insensitive" buyers like foreign central banks see their market footprint shrink while "price-sensitive" buyers in the private sector increase theirs.

According to Barclays, the overseas private sector now owns more of the $25 trillion U.S. debt outstanding than the overseas official sector. All else equal, those who "choose" to buy Treasuries rather than those who "need" to buy them will demand more compensation for absorbing the increase in supply.

"This has implications for how Treasury supply will be received by markets, not just in terms of the term premium that is demanded to own Treasuries, but also the volatility of the rates markets," Barclays analysts wrote last month.

Source: Reuters

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Samantha Luan

Economic

Political

The move, opposed by U.S. steelmakers and Gulf Coast shrimpers but backed by retailers and other business groups, would reduce the punitive anti-dumping duties set on Vietnamese imports because of its current status as a non-market economy with heavy state influence.

"Vietnam is already a market economy," said Ted Osius, head of the U.S.-ASEAN Business Council, which backs the upgrade. "It has met key criteria such as currency convertibility and is ready for an accurate designation."

The Commerce Department will hear arguments from both sides during a virtual hearing on Wednesday afternoon in Washington as part of a review due to be completed in late July.

Vietnam has argued to be freed of the non-market label because of recent economic reforms, saying retaining the moniker is bad for increasingly close two-way ties that Washington sees as a counterbalance to China.

During Biden's visit to Hanoi last year, the two countries elevated ties to a "comprehensive strategic partnership", lifting Washington's diplomatic status in Vietnam to match China and Russia.

Last year, Vietnamese Prime Minister Pham Minh Chinh also urged U.S. Treasury Secretary Janet Yellen for an end to the non-market label, befitting Vietnam's status as a U.S. "friend-shoring" destination to diversify supply chains away from China.

The current designation lumps Vietnam in with China, Russia, Belarus, Azerbaijan an nine other countries as non-market economies subject to higher anti-dumping duties.

"American businesses are already investing significantly in Vietnam as they recognize its growth potential," said Osius, a former U.S. ambassador to Vietnam.

The Commerce Department has a fairly narrow set of criteria for determining market economy status.

These include the extent to which the country's currency is convertible; its wage rates are a result of free bargaining between labor and management, and permission for joint ventures or other foreign investment.

Further criteria include whether the government owns or controls the means of production and the government controls the allocation of resources and price and output decisions.

It can also consider other factors.

LOWER SHRIMP DUTIES

Goods from non-market economies are subject to higher tariff rates in anti-dumping duty investigations that use third-country proxy prices to determine a product's fair market value.

This year, the U.S. International Trade Commission renewed anti-dumping duties of 25.76% on frozen farmed shrimp from Vietnam, but duties on shrimp from Thailand, a market economy, are only 5.34%.

The Southern Shrimp Alliance of U.S. shrimp fishermen and processors said it opposed the grant of market economy status because of Vietnam's bars on land ownership, its weak labor laws and lower shrimp duties that would hurt its members.

Upgrading Vietnam's status also faces significant opposition in Congress, with eight U.S. senators and 31 members of the House of Representatives making similar arguments to Commerce Secretary Gina Raimondo.

They have urged her to also consider that the move would aid Chinese state firms that have invested heavily in Vietnam, by letting them more easily circumvent U.S. tariffs on their goods.

Roy Houseman, legislative director of the United Steelworkers Union (USW), added that the change would "erode our domestic manufacturing base, undermine U.S. supply chain resiliency and reinforce Vietnam's role as a conduit for an influx of unfairly traded Chinese goods."

Biden has heavily courted union votes in the looming November presidential election, particularly from steelworkers in the key swing state of Pennsylvania.

He has opposed Nippon Steel's proposed takeover of Pittsburgh-based U.S. Steel, and called for sharply higher "Section 301" tariffs on imports of Chinese steel.

Source: Reuters

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Warren Takunda

Economic

Stocks

The Bank of Japan may take monetary policy action if yen falls affect prices significantly, governor Kazuo Ueda said on Wednesday, offering the strongest hint to date the currency's relentless declines could trigger another interest rate hike.

Finance Minister Shunichi Suzuki also voiced "strong concern" on Wednesday over the negative impact of a weak yen, such as boosting import costs, and repeated Tokyo's readiness to intervene in the market to prop up the sagging currency.

The remarks, which followed a meeting between Ueda and Prime Minister Fumio Kishida on Tuesday, underscore the resolve of the government and central bank to cooperate in keeping damaging yen falls in check.

"We need to be mindful of the risk that the impact of currency volatility on inflation is becoming bigger than in the past," as firms are already becoming more keen to raise prices and wages, Ueda told parliament on Wednesday.

"Exchange-rate moves could have a big impact on the economy and prices, so there's a chance we may need to respond with monetary policy," he said.

The remarks compared with those Ueda made after the BOJ's policy meeting on April 26, when he said the yen's recent falls did not have an immediate impact on trend inflation.

Ueda's post-meeting comments have been cited by some traders as having accelerated the yen's declines by heightening market expectations the BOJ will hold off on raising interest rates from current levels around zero for some time.

Those two indexes each finished up about one tenth of one percent while the Nasdaq fell one tenth.

"The BOJ doesn't want to give the impression it could be forced to hike rates to deal with the weak yen. But it also needs to show it is paying heed to the economic impact of yen falls," said Izuru Kato, chief economist at Totan Research.

"The governor probably tried to strike that balance by changing the tone of his remarks somewhat."

After the yen hit a 34-year low of 160.245 per dollar on April 29, Japanese authorities are suspected to have spent more than 9 trillion yen ($58.4 billion) intervening in the market last week to prop up the currency.

The dollar stood at 155.20 yen on Wednesday, creeping up from a roughly one-month high of 151.86 on May 3.

Ueda repeated that the central bank will "adjust the degree of monetary accommodation" - code for rate hikes, according to BOJ watchers - if trend inflation accelerates toward its 2% target as it projected last month.

He also said BOJ won't necessarily wait for inflation to reach its target one-and-half to two years ahead, in raising rates.

"If trend inflation appears to accelerate as we project, we will adjust the degree of monetary accommodation accordingly," Ueda said, signaling the chance of raising rates near-term and in several stages in coming years.

Many market players expect the BOJ to raise interest rates again sometime this year, having ended negative interest rates and other remnants of its radical stimulus in March.

Speaking in the same parliament committee, finance minister Suzuki said authorities were ready to take "all means available" to deal with excessive yen falls that hurt households and companies by inflating import costs.

Suzuki also said authorities were not looking at specific yen levels in deciding whether to take action. He declined to comment on what he deemed as excessively volatile moves.

Source: Reuters

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Warren Takunda

Economic

Stocks

European stocks rose on Wednesday, boosted by company earnings, while U.S. futures were flat and the dollar climbed as investors assessed the signals on the path for Federal Reserve interest rates.

The yen fell even with the threat of currency intervention from Japanese authorities to support it. Oil prices wallowed near two-month lows.

Europe's continent-wide Stoxx 600 index (.STOXX) rose 0.32% on Wednesday, supported by upbeat earnings reports, after rising 1.1% the previous day. Germany's DAX (.GDAXI) climbed 0.45% and Britain's FTSE 100 (.FTSE) rose 0.35%.

Global stocks fell sharply in April as strong U.S. economic data caused investors to rein in their bets on rate cuts from the Fed and, by extension, other major central banks this year.

But they have rallied again in May, partly encouraged by Friday's nonfarm payrolls jobs report, which showed a cooling in the hot U.S. labour market. European Stocks Rise, Dollar Climbs as Fed Rate Path Pondered _1

European Stocks Rise, Dollar Climbs as Fed Rate Path Pondered _1

Minneapolis Fed President Neel Kashkari suggested the U.S. central bank may still need to forgo interest rate cuts this year due to stubborn inflation.

"The market is trying to suss out whether data, particularly out of the U.S., is still coming out strong, or is coming out just right," said Samuel Zief, head of global FX strategy at JPMorgan Private Bank.

"Things in this week so far are more driven by the micro than the macro: Company-specific earnings releases and things like that have been driving things."

U.S. stock futures for the S&P 500 and Nasdaq indexes were little changed on Wednesday. Four straight sessions of gains for the S&P has put it within 1.5% of the record high touched in March.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.45% overnight.

In currency markets, the yen dropped 0.5% to 155.42 per dollar even after Bank of Japan governor Kazuo Ueda said the central bank may take monetary policy action if currency falls affect prices significantly.

Japan has intervened to boost the currency from its lowest level in 34 years in recent days, according to traders and analysts, keeping the market alert for further swings.

The dollar index , which tracks the currency against six peers, rose 0.16% to 105.59, although remained around 1% below a 5-1/2 month high touched in April.

U.S. Treasury yields have fallen in recent days as traders have moved to price back in two interest rate cuts from the Fed this year, having seen one as most likely in the middle of April. The 10-year yield, which moves inversely to the price, was little changed at 4.469% on Wednesday.

Crude oil extended Tuesday's declines after market sources said that data due later from the American Petroleum Institute will show a jump in U.S. crude and fuel stocks for last week, a sign of lower demand.

Meanwhile, the U.S. believes negotiations on a Gaza ceasefire should be able to close the gaps between Israel and Hamas, lessening the risks of supply disruptions. Brent crude oil futures fell 1.4% to $82.02 a barrel.

Source: Reuters

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Warren Takunda

Stocks

Economic

Asian stocks slipped on Wednesday, while the dollar climbed despite lower U.S. Treasury yields as markets assessed mixed signals from U.S. policymakers and economic data on the path for Federal Reserve interest rates.

The yen sank even with the threat of currency intervention from Japanese authorities to support it.

Crude oil wallowed near two-month lows amid signs of easing supply pressure and continued hopes for a Middle East ceasefire.

MSCI's broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) slid 0.4%, with mainland Chinese blue chips (.CSI300) and Hong Kong's Hang Seng (.HSI) each down about 0.6%.

Japan's Nikkei (.N225) slumped about 1.4% as traders took profits following the previous session's 1.6% surge. The tech-heavy index also succumbed to pressure from a sell-off in U.S. chip stocks on Tuesday (.SOX)

U.S. stock futures were flat, while German DAX futures lost 0.1% and Britain's FTSE futures added 0.15%.

The yen dropped 0.34% to 155.215 per dollar , even as Japan's Finance Minister Shunichi Suzuki expressed deep concern over the negative impact of a weak currency and reiterated a readiness to respond to excessive volatility.

The U.S. dollar index - which measures the currency against the yen, euro, sterling and three other major peers - rose 0.14% to 105.57, adding to Tuesday's 0.3% advance.

The euro edged down 0.12% to $1.07325 and sterling lost 0.18% to $1.24865.

On Tuesday, Minneapolis Fed President Neel Kashkari suggested the U.S. central bank may need to forgo interest rate cuts this year due to stubborn inflation.

Last week, Fed Chair Jerome Powell said the wait to loosen policy is taking longer than anticipated, but signalled his inclination is still to cut.

And while prices have been sticky, the labour market showed some signs of weakening in the monthly payrolls data from Friday. The next major data point will be consumer prices in a week from now.

"Debate continues within markets and amongst policymakers about the appropriate level for interest rates," Kyle Rodda, senior financial markets analyst at Capital.com, wrote in a report.

"A lack of major U.S. economic data in the days ahead (means) there was little to position for or react to," he added. "For now, the markets see marginally higher chances for two cuts in the U.S. this year, with the first fully baked in for November."

U.S. long-term Treasury yields stood at 4.47% in Asian trading, after dipping to a nearly one-month low of 4.42% on Tuesday.

Gold slipped 0.25% to around $2,319.50 per ounce.

Meanwhile, the U.S. believes negotiations on a Gaza ceasefire should be able to close the gaps between Israel and Hamas, lessening the risks of supply disruptions.

Brent crude oil futures fell 46 cents, or 0.55%, to $82.70 a barrel. U.S. West Texas Intermediate crude futures slid 41 cents, or 0.52%, to $77.97 a barrel.

Source: Reuters

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Cohen

Economic

Stocks

Investors shouldn't chase the recent gains further at the index level, strategists at the US bank led by Laura Wang and Jonathan Garner wrote in a note Tuesday. They recommended instead pursuing single-stock and thematic opportunities given improved investor sentiment.

“Global investors' fund positions have already improved; meanwhile, there is less urgency to diversify away from the US and Japanese markets, given that the geopolitical, yield, and FX factors are abating or reversing,” they wrote. “We also see near-term technical overbought signals, which could deter further buying by global quant funds.”

The rebound of Chinese equities from multiyear lows is stoking optimism that the market has bottomed, with analysts at Goldman Sachs Group Inc. saying that a fear of missing out is building among traders. Market watchers though remain divided, with some pointing to weak earnings growth and a deflating property sector as reasons for staying on the sideline.

The onshore CSI 300 Index lost as much as 0.7% Wednesday, after jumping to its highest level since October in the previous session. The Hang Seng Index was on track to fall for a second day, following a 10-day winning streak.

Benchmark gauges in Hong Kong have all rallied more than 10% since the end of March as cheap valuations, improving macro data and Beijing's supportive policy stance attract inflows. The Hang Seng Index was one of the best performers among major gauges in April.

The rally has propelled the 14-day relative strength indexes of both the Hang Seng Index and Hang Seng China Enterprises to above 70, a level that many regard as showing the gauges are overbought.

China's consumption levels and the housing market likely need more time to pick up, implying ongoing pressure on deflation and corporate earnings, the Morgan Stanley strategists wrote. The pace of real estate policy change is likely to remain “rather modest,” they added.

Skeptics Abound

“While Beijing's vow to deepen reform and expand opening-up eased some investor concerns about economic uncertainty, it remains a question of debate whether the policies introduced so far will be effective in stemming the property downturn,” said Shen Meng, a director at Chanson & Co. “In addition, it seems Xi's trip to France failed to achieve the expected outcome of creating a divide among Western countries, especially in economy and trade.”

The real estate market has remained depressed even as Beijing vowed to deal with unsold properties, and more cities eased home purchase restrictions to revive sales.

There are more pessimists. Union Bancaire Privee said the recent outperformance of the Hang Seng is likely driven by flows from inside China, and might not be backed by fundamentals. Bank of America Securities warned that investor conviction remains low and the rally could be derailed by factors such as geopolitical tensions, weaker macro data and policy disappointment.

Morgan Stanley was among the first Wall Street banks to downgrade Chinese stocks — doing so in August as the market rout deepened — and has since kept its equal-weight rating. The firm further slashed targets for major Chinese stock benchmarks in January. The MSCI China Index has rebounded 14% since then.

Looking ahead, Morgan Stanley also sees geopolitical uncertainty as a headwind for Chinese equities given looming US elections and EU trade controversy.