Daily Commentary BY THE CURVE TEAM –

Volatility Continues Ahead of Big Week

19th of February, 2018

Volatility continued to permeate markets on Friday night. While equity markets were far more subdued, we saw wild swings in forex markets to close the week. It sets up for a big week ahead where bonds and the Fed will be in focus offshore before we get a very key piece of local data.

The USD looks like it finally may have formed a base after being beat up for most of the week. It copped a fair bit of punishment early on as equity markets spent the week recovering and bond yields threatened to really get moving higher. It looked like more of the same on Friday before the EUR pulled back from a high of 125.55 to be trading back at 1.24 this morning, taking others such as the AUD down with it.

With so much short interest in the US bond market, the recent run higher over the past two months stalled as the week came to a close with the 10 year yield trading off its highs and back below 2.90%. There is a chance we could see yields fall further before the run higher resumes but there are a number of potential catalysts on the horizon for another leg higher.

This week will see a huge amount of bond issuance from the US Treasury to the tune of $200bln. How those auctions are received could well determine where yields go. There will also be plenty of Fed speakers, as well as the minutes from the most recent FOMC meeting, so bonds will be the key market to watch as the week unfolds.

Interest rates will also be in focus in Australia this week as we await what is now arguably the key release for the monetary policy outlook. Wages data for the fourth quarter will be out and the market doesn’t have high hopes for any imminent pick up in the pace of growth. Current expectations are for another 0.5% increase with the annual rate unchanged at 2%.

The relationship between the underemployment ratio and the wage cost index suggest upside risk to those expectations. However given the lag, we may need to wait to the first quarter data in three months time to see any uplift. Also out this week is the RBA’s minutes from the February meeting.

David Flanagan

Director - Interest Rate Markets