100419RBAM 100419RBAM 100419RBAM

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

Forex 5 minutes to read
Charu Chanana 400x400
Charu Chanana

Head of FX Strategy

Summary:  Divergence in US and Eurozone PMIs boosted the US exceptionalism story once again and brought back gains in the dollar. Q3 GDP data due this week can further accentuate this trend, while ECB’s dovish surprise could make EURUSD threaten to break below 1.0550. AUDUSD boosted by hot Q3 CPI while RBA’s tolerance to high inflation is seen limited, but China and global sentiment drags likely to continue.


Key points

  • US PMIs signalled a continuation of US exceptionalism story, offering a false sense of relief on the growth front
  • We remain cautious going into the end of the year given the consumer weakness signalled by credit card debt statistics and rising delinquency rates
  • Misguided sense of relief on geopolitics as well as Israel delays ground operation in Gaza
  • USD likely to be sideways until US data starts to weaken or geopolitical concerns de-escalate
  • EUR downside still prominent after PMIs and bank lending survey highlight recession concerns, but spikes to 1.0650 cannot be ruled out
  • AUD buoyed by hot CPI boosting the case for RBA November rate hike and China’s budget boost, but AUD cannot ignore China’s property sector concerns and growing global recession fears
25_FX_Daily

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.

25_FX_EURUSD
Source: Bloomberg

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.

25_FX_AUD

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.