USD lower, stocks rise as focus turns to RBA

Headlines

* Hamas accepts ceasefire proposal for Gaza, Israel to continue Rafah operation

* RBA expected to remain neutral for now, as it wrestles with sticky inflation

* Gold gains on soft dollar, improved rate cut hopes

* Stocks rise to kick off the week, as earnings releases slow up

FX: USD printed a narrow ranged inside day and settled flat on the day. We heard mixed Fedspeak and geopolitical news. One FOMC voter stressed the job is not done yet, while another said he still feels like the weight of risks is moving towards inflation. The spike low after the NFP release touched 104.52.

EUR moved higher towards 1.08 before paring gains. Final Eurozone Services and Composite PMI data saw mostly strong or stronger than expected outcomes for April. The region’s figure was the highest since May 2023. There were a lot of ECB speakers who sounded relatively confident on progress on inflation. The 50-day and 200-day SMAs sit above at 1.0793/95.

GBP saw mild gains with the UK on a bank holiday. There is little domestic data to focus on. The positive risk mood and better technical position of GBP could see buyers push above the 200-day SMA at 1.2548.

USD/JPY underperformed as the major bounced further away from the strong zone of support around 152 from Friday. Friday’s softer US employment data and mildly more dovish FOMC meeting have helped move the dollar side. But history shows that unilateral intervention is rarely successful.

AUD outperformed as US stocks continued higher. Attention turns to the RBA meeting in a few hours. USD/CAD fell with US/Canada spreads steady.

Stocks: US equities carried on the buying from the end of last week. The broad-based benchmark S&P 500 finished 1.03% higher at 5,181. The tech-laden Nasdaq 100 added 1.13% to close at 18,094. The Dow Jones underperformed, up 0.46% to settle at 38,852. Last week’s US risk events saw rate cuts bets brought forward. That saw the rate-sensitive small caps outperform. Apple fell 0.9% as Berkshire Hathaway said it cut its stake in the iPhone maker by 13% and is now valued at $135bn. Tesla rose 1.97% as it launched another round of layoffs.

Asian Stocks: APAC futures are green. Asian stocks traded positively following the decent performance from Wall Street. Japan and South Korea were closed for holiday, so liquidity conditions were thin. The ASX 200 was led higher by rate-sensitive sectors with financials helped by Westpac’s earnings, buyback and special dividend announcement. The Shanghai Comp played catch up after last week’s holiday with property stocks boosted by recent support pledges.

Gold gained, reversing the losses from the last two days of last week. Yields fell for a fourth straight day. The 10-year yield has fallen from 25bps from 4.73% to 4.48% in just over a week.

Day Ahead – RBA Meeting

The RBA will keep its policy rate steady at 4.35%. The bank watered down its tightening bias in late March. But since that meeting, the key macroeconomic data, chiefly Q1 CPI and March jobs figures, has surprised to the upside. Trimmed mean CPI increased by almost 4% q/q and the weighted median CPI rose by 4.6% q/q. This pace of underlying inflationary pressure is incompatible with achieving the RBA’s 2–3% target band.

The unemployment rate rose to 3.9% in March, only 0.4% above its trough. That leaves the labour market still near ‘full employment’. Markets are pricing most of a 25bps rate hike by the September meeting. A neutral setting for now is likely with the economy slowing in other areas.

Chart of the Day – AUD/USD comes into resistance

The language in the statement will obviously be key, with markets watching the press conference and SOMP eagerly.  If the RBA adopts a more hawkish tone, it could note it considered a hike at the meeting. Otherwise, a neutral message on rates would leave the AUD mostly in the hands of global risk appetite and any China developments.

AUD/USD has risen since spiking lower in the middle of last month to 0.6362. Prices then traded around the 50-day and 200-day SMAs. These are currently at 0.6535 and 0.6519 respectively. We have now seen four straight days of buying. But the major has bumped up into resistance at a Fib level (38.2%) of the Q4 rally at 0.6641. This level capped the upside previously in March and April.

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