The Australian dollar printed 3-month lows at 0.6443 last week in the wake of elevated US CPI data but was able to recover its lost ground over the week. This week’s focus will be on the reopening of mainland China markets and Australian Q4 wages data.
Last week we warned that the monthly US consumer price index release has often been the spark for large moves in FX and interest rate markets over the past 2 years or so. US January CPI was another case in point. Overall inflation came in at 3.1%yr, down from 3.4%yr in December but above the 2.9% expected, while CPI ex-food and energy remained at 3.9%yr versus an expected softening to 3.7%yr.
This bolstered the US dollar’s yield appeal, the 2-year Treasury note yield jumping 18 basis points to 4.66% on Tuesday (Australian 2-year yields are around 3.84%). The US Dollar Index rose 0.8% on Tuesday, to highs since November 2023. The US dollar rose above 150 Japanese yen for the first time since November and the euro marked similar lows.
But the US dollar was unable to extend its gains, edging lower into the weekend despite US yields holding most gains. Perhaps undermining the US dollar’s safe haven appeal are some glimmers of optimism over China’s economy. As the Chinese stock market prepared to open today, official newswires highlighted data showing a 19% rise in domestic tourist travel and 8% rise in lunar new year holiday spending compared to pre-Covid 2019.
There is also an expectation that Chinese equities can resume the rally that – with official help – commenced 3 days before the LNY holidays, if only by catching up with the gains in other Asia-Pacific equity markets last week. Whether longstanding global investor pessimism on China’s economy changes much remains to be seen.
It is a relatively quiet data week in Australia and globally. We have already heard plenty from the RBA this month but the February meeting minutes should still draw some attention, especially as they usually add some specifics on the discussion over the cash rate decision.
The quarterly pace of Australian wages growth is expected to slow to 0.9%qtr in Q4 after the 1.3% jump in Q3 which was boosted by the minimum wage decision and enterprise agreements linked to high headline inflation earlier in 2023. The annual rate should edge up to 4.1% from 4.0% but Westpac forecasts wages growth to ease to 3.2%yr by end-2024 as the labour market softens.
China’s return will add plenty of volume to commodity trade. Last week, the LME metals index jumped 3.2% but remains within recent ranges and well down over the past year. Spot iron ore resumes after LNY around US$130/tonne. Energy prices are mixed – crude oil has pushed up to match highs since October but European natural gas prices have fallen to lows since June 2023. Last month was reportedly the warmest January globally on record, following the warmest December.
Event risk
China markets reopen after lunar new year holidays, US Presidents Day holiday (Mon), RBA Feb meeting minutes (Tue), Aust Q4 wage price index, US FOMC Jan meeting minutes (Wed), Advance February S&P Global PMIs in Eurozone, US, UK et al (Thu), NZ Q4 retail sales, Japan holiday, Germany Feb IFO business survey (Fri)
