Overnight Headlines

*Goldman warns US recession risk now higher, more front-loaded

*China Covid outbreaks shift to south with Shenzhen, Macau on alert

*Aussie dollar edges up as RBA reaffirms more hikes ahead, yen struggles

*Asian equity markets broadly higher, Dow futures jump

US equities were closed for Juneteenth holiday and reopen today. Low intraday volatility was seen in other global markets with limited liquidity. European stocks were higher yesterday with banks taking the lead. The positive sentiment has carried over into Asia today. Japan leads the advances with the Nikkei 225 climbing more than 2%. Futures in Europe and the US are positive.

USD had a narrow range day and the second straight “inside day”. FX markets were quiet due to the US holiday with small ranges across the majors. EUR continues to trade around 1.05 and GBP above previous support at 1.2155. USD/JPY remains near last week’s high, trading just above 135. USD/CAD has fallen back below 1.30 while AUD is struggling to push above 0.70.

Event Takeaways – RBA flags a lot more policy tightening

Governor Lowe, the RBA chief, has signalled that rates are still “very low” which means the bank will raise them so that higher inflation does not feed into wage claims. He warned prices pressures continued to build with inflation reaching 7% by the end of the year. This is far above the RBA’s long-term target band of 2-3%.

But Lowe played down the chances of a super-sized 75bp hike. He also took issue with market pricing of rates reaching as high as 4% by year end. The current official cash rate sits at 0.85%. He indicated that the bank is rather evaluating going by 25bps or 50bps at the coming meeting. Lowe also noted that a year end rate of 4% would badly hurt consumer spending and slow the economy a lot. Markets pared back hike bets for December, though rates are still seen at 3.5%.

Chart of the Day –USD/CHF’s wild ride

The regime shift by the SNB last week has shaken the dynamics of CHF. The traditionally uber-dovish central bank shocked markets by raising rates by 50bps. This cut the deposit rate from -0.75%, a rate which had prevailed since 2015. After years of fighting deflation, inflation is being tackled with the central bank beating the ECB in tightening policy. The SNB also indicated that a strong CHF is no longer an issue for them. In fact, it is acceptable as it allows inflation to stay more moderate.

USD/CHF has been exceptionally volatile over the past few weeks. The major hit parity on dollar strength in mid-May and last week. But it has then tumbled sharply. Support has come from the 50-day SMA, which was around 0.96. It currently sits at 0.9714. Trendline support comes in around 0.9670 with long-term support around 0.95.