Macro/FX Watch: US exceptionalism, China budget boost, hot Australia CPI and ECB’s upcoming pause

USD: Misplaced growth and geopolitical relief

The USD was sold off on Monday but reversed all of its losses yesterday with the US exceptionalism story seemingly continuing for now. US preliminary PMIs yesterday for October surprised to the upside, with both manufacturing and services coming in the expansion territory. Manufacturing PMI was at 50.0 (prev. 49.8) against the expected 49.5 while services rose to 50.9 from 50.1, despite consensus for a decline to 49.9. Overall, the compose PMI was strong at 51.0 from 50.2 in August and consensus at 50.0. This has brought the expected 2024 terminal rate a notch higher to 4.6% from 4.5% earlier, as higher-for-longer gets more weight. Similar message could come from the advance Q3 GDP data due in the US tomorrow. Consensus expects growth of 4.5% QoQ annualized from 2.1% previously. However, despite the US economic strength sustaining, we remain cautious going into the end of the year given the consumer weakness signalled by credit card debt statistics and rising delinquency rates. Markets are likely to get a misplaced sense of relief from the strong US economic data, and therefore any strength of the US dollar could continue to remain short-lived.

However, on the other hand, market also has a misplaced sense of relief on the geopolitical front with Israel holding off on the ground invasion of Gaza. Oil has seen huge declines this week as the war premium gets erased amid reports that Israel may be reconsidering its ground invasion on humanitarian grounds. However, air strikes continue and risks of a regional escalation still remain. If geopolitical concerns were to widen, we could see a bid again in USD. Likewise carry trades could also keep USD supported, but from a fundamental and yield perspective, strength of the dollar is looking shaky.

Market Takeaway: US economic data could remain strong this week, providing a false sense of relief. USD gains coming from data surprises will likely remain shaky.

EUR: Dismal PMIs and bank lending survey makes ECB dovish surprise likely

While the US PMIs were strong yesterday, there was a broad underperformance in Eurozone PMIs both relative to expectation and relative to the US, breaking any myths of a potential stabilisation. Eurozone composite PMI slipped back to 46.5 from 47.2 with manufacturing staying weak at 43 while services disappointed, slipping back to 47.8 from 48.7 (vs. 48.6 expected). PMI indicators also showed price pressures cooling and job market loosening, suggesting ECB may have a high chance of surprising dovish this week. Bank lending survey also showed further pressure from tighter lending standards and weak borrowing demand. EURUSD slid back lower to the 1.06 handle from highs of 1.0694.

While the Eurozone growth outlook continues to deteriorate, a lot of the bad news is priced in the EUR. China stimulus plans also will likely be modestly supportive for EUR, but a significant dovish surprise from the ECB this week could threaten channel support at 1.0570. Reversal above 0.236 resistance at 1.0643 may be needed to bring uptrend in focus.

Market Takeaway: Macro backdrop remains downbeat but positioning has been turning long. All eyes on ECB where a dovish surprise can bring EURUSD lower to 1.0550 levels, but spikes to 1.0650 area remain likely as USD loses traction.

AUD: Buoyed by hot CPI and China budget boost

We had highlighted last week the case for a divergence in Australia and New Zealand’s inflation for Q3. Australia’s Q3 CPI came in higher-than-expected today, with the headline rising 5.4% YoY vs. 5.3% expected and trimmed mean rising 5.2% YoY vs. 5.0% expected. This comes after recent comments from RBA Governor Michelle Bullock who has been stressing low tolerance towards slow return of inflation to target, which had the markets extremely sensitive to the inflation reading. AUDUSD rallied to test the 0.64 handle this morning before easing slightly. We still believe that the bar for the RBA to hike rates is very high, given the labor market has been cooling. Gains in AUDNZD also extended to 1.09+ levels, but we remain sceptical that these could stick.

AUD also got a boost from China’s one-trillion yuan budget boost announcement which lifted industrial commodities. However, property sector overhang still continues, and any lift to AUD may remain temporary.

Market Takeaway: AUDUSD and AUDNZD extended gains on China stimulus and hot CPI making the November rate hike a possibility, however it will remain hard for AUD to ignore China’s property sector overhang and global recession concerns.