AUSSIE BONDS: Nov-32 Supply Goes Well, Solid Demand

AUD/USD is little changed in the first part of Wednesday dealings, last near 0.6250/55, as the market awaits the Q4 and Dec monthly CPI outcomes. Whilst broader USD sentiment is heavily tied to tariff developments in the US, AUD/USD correlations with the relative AU-US monetary policy outlook remain quite strong. The table below presents the correlations with various macro drivers, in level terms, going back over the past 6 months. The strongest correlation is with the respective monetary policy outlooks priced for the two economies. If we shorten the correlation to the past month, it is much stronger with global equities (88%), which likely captures the broader risk shifts around the US/global outlook. 

• Our bias for today's CPI print rests with the need for a downside surprise on the trimmed mean print (like sub 0.50%q/q, compared with the consensus of 0.60%) to see a Feb hike fully priced. Current pricing for the RBA Feb meeting is just under 80% priced.
• This would weigh on the AUD, with downside focus at 0.6209, the Jan 21 low. The bear trigger is back at 0.6131.
• Conversely an as expected outcome or upside surprise on trimmed mean, could see Feb cut odds trimmed and support AUD. Initial resistance is at 0.6325, the 50-day EMA. 

Table 1: AUD/USD Correlations With Key Macro Drivers (Levels), Past 6 Months 

Base Metals 0.306
Aggregate Commodities -0.366
Iron Ore-0.546
Global Equities -0.511
1yr Ahead AU-US 3mth Policy Rate Differential 0.912

Source: MNI - Market News/Bloomberg 

RBA-dated OIS pricing is slightly firmer across meetings ahead of today’s Q4 CPI data. 

• However, current pricing remains 3-10bps softer compared to levels seen prior to the release of November’s Monthly CPI data in early January.
• Economists are divided on the timing of the first RBA rate cut, with opinions split between February and Q2. This makes today’s CPI data a critical focus.
• While the headline CPI is expected to rise by 0.3% q/q, bringing the annual rate down to 2.5% from 2.8%, the market’s attention will likely centre on the underlying trimmed mean and services inflation. These components will be scrutinised as government electricity rebates are expected to weigh on the headline figure.
• A 25bp rate cut is more than fully priced for April (121%), with the probability of a February cut at 76% (based on an effective cash rate of 4.34%).

Figure 1: RBA-Dated OIS – Today Vs. Yesterday

Source: MNI – Market News / Bloomberg

Oil prices rose moderately on Tuesday driven by the persistent threat of an increase in protectionism. Oil is the most important Canadian export to the US and the US imports over half of its crude from Canada. President Trump has threatened 25% tariffs from Saturday, which would likely increase domestic fuel prices. They have been trending lower since mid-January but are still higher on the month. 

• WTI rose 1.1% to $73.98/bbl after reaching $74.31 and then falling to $72.93. The 50-day EMA is at $72.16, clearance of this would signal scope for a deeper retracement. While the benchmark is down 0.9% so far this week, it is still up 3.8% on the month. It has started today slightly lower at $73.90. Initial and key resistance is at $79.48.
• Brent is 0.7% higher at $77.63/bbl after a high of $78.18 followed by a low of $76.85, remaining above the 50-day EMA at $76.01. It is down 1.1% this week but up 4% in January. Initial resistance is at $82.63, January 15 high.
• Bloomberg reported that US inventories rose 2.86mn barrels last week, according to people familiar with the API data. There has been a sharp increase of flows from Canada to beat the February 1 introduction of tariffs. Gasoline stocks rose 1.89mn while distillate fell 3.75mn. Official EIA data is released later today.
• Tightened sanctions on Russia and expectations of greater enforcement of those against Iran had boosted prices earlier in January. Crude fell yesterday following reports that Russia is attempting to avoid sanctions by shipping crude to India on restricted vessels anyway. The EU has proposed further measures on Russian banks and shadow fleet tankers.