Credit Agricole

Asia overnight

Ahead of the Lunar New Year holiday period in Asia, sentiment enjoyed a modest bounce spurred on by better-than-expected China PMI data as well as some growing investor comfort with higher rates; Chinese technology stocks led the rally. Most Asian bourses as well as S&P 500 futures were higher at the time of writing.G10 FX traded in a risk-on fashion with the AUD leading the pack ahead of the RBA meeting on Tuesday. The JPY and USD were the underperformers during the session.

RBA to unchain the AUD?

The highlight for the AUD this week will be the RBA meeting on Tuesday. Australian underlying inflation is in the top half of the RBA’s target band and the unemployment rate is already close to the central bank’s estimate of the natural rate; both have occurred a year earlier than the RBA expected. While the RBA could continue blaming temporary factors such as border closures and supply chain blockages for these circumstances, it is more likely to accept the new normal, and end its QE programme and bring forward the timing it expects to begin raising rates.

Indeed, ending QE tomorrow would signal that a rate hike in late 2022 is a possibility, as historically the RBA has waited about six months between ending an easing cycle and beginning a tightening cycle. The RBA is likely to point to rate hikes in 2023 now being its new central scenario (previously late 2023/early2024) and that rate hikes in 2022 are only an outside possibility. The market is used to being disappointed by the RBA when it comes to its hawkishness, however, hence it remains short the AUD. So, the RBA coming close to market expectations would be enough to get the AUD to rally. Close, in our view, would consist of the RBA acknowledging the odds of a rate hike in 2022 are no longer insignificant.

Citi

European Open

USD weakness was the major theme of the day, with DXY dipping 0.17% in a continuation of the trend seen towards the NY close. Over the weekend, the Fed’s Bostic, in an interview with the Financial Times, left the door open to 50bps hikes as well as moves in consecutive meetings, which saw UST flatten led by the front end yields up, with 2y +3bps. Italy’s presidential election finally came to a conclusion, as Italian President Sergio Mattarella was formally re-elected on Saturday. Meanwhile, lower Chinese PMI prints revealed demand weakness prior to the Chinese New Year holidays.

Looking ahead, Fedspeak and data will be top of mind. We see the Dallas Fed Manf. Activity at 15:30 GMT, followed by Fed’s Daly at 16:30 GMT. We note that Daly is expected to sound more cautious in his speech. EUR will see Eurozone and Italy GDP at 10:00 GMT, while German CPI is expected at 13:00 GMT. In the EM space, we will see TRY trade balance at 07:00 GMT, HKD retail sales at 08:30 GMT, and MXN GDP at 12:00 MGT.