Market Briefing: RBNZ in focus today
Have a look at the latest edition of our Event Radar & Views In A Nutshell pack.
Risk wobbles. Slightly more negative tone across markets overnight. US equities & yields declined. USD firmer. AUD lost a bit of ground.
JPY weakness. JPY remains on backfoot as participants factor in the new PM's potential policy push. AUD/JPY near levels traded last November.
RBNZ cut. RBNZ in focus today. NZD & AUD/NZD vol. likely. Markets/analysts split on how large the rate cut may be. NZ economy needs more support.
Global Trends
A couple of wobbles across risk assets overnight with US equities and bond yields dipping, while the USD strengthened. More specifically, the S&P500 broke its run of 7 straight daily gains (-0.4%) due to some stock specific forces, yet it remains within striking distance of its record highs. The US 10yr yield shed ~3bps to be back near the middle of its 1-month range (now ~4.12%). In FX, the softer EUR stemming from the political upheaval in France (now ~$1.1657) and more JPY weakness as participants continue to factor in the new Prime Minister’s potential policy mandate were catalysts. USD/JPY (now ~151.94) touched its highest point since February to be ~3% above where it ended last week. The backdrop also exerted downward pressure on the AUD (now ~$0.6584) with the NZD also losing altitude (now ~$0.5801) ahead of today’s RBNZ meeting where a larger 50bp rate cut might be announced (12pm AEST).
In the US the Government Shutdown remains in place with no strong signs that it might end quickly. It was reported that ‘furloughed’ Federal Government employees aren’t guaranteed paychecks, while President Trump stated ‘permanent’ job cut could be unveiled in “four to five days”. We expect the shutdown to mechanically depress US economic activity over the near-term with past iterations shaving ~0.1%pts off US GDP growth each week they lasted. Moreover, the shutdowns are creating an economic data vacuum as officials statistics aren’t able to be processed/published during this time. We believe the current situation bolsters the case for the US Fed to run with its recent forecasts and cut interest rates again at its meeting in late-October.
In the very near-term the JPY weakness could generate some further USD support. USD/JPY is the second most traded currency pair, so JPY trends have an indirect impact across other currencies. That said, we do feel the sharp moves in the JPY are looking a little overdone. As outlined yesterday underlying inflation trends in Japan are different to what they were in the past and this may mean the BoJ won’t be able to pivot from raising interest rate again. The prospect of more aggressive fiscal measures being deployed in Japan also aren’t as elevated as some think, in our view. A reversal lower in USD/JPY down the track would align with our broader view that the challenging US growth backdrop and outlook for a series of US Fed interest rate cuts could see the USD weaken over coming months.
Global event radar: RBNZ (Today), US CPI (15 Oct**), US Retail Sales (16 Oct**)
Trans-Tasman Zone
The shaky risk sentiment overnight, coupled with a firmer USD due to lingering EUR and JPY weakness has exerted a bit of downward pressure on the AUD and NZD (see above). At ~$0.6584 the AUD is near the bottom of its rather tight 1-week range and just below its 1-month average. The AUD has been more mixed on the crosses. AUD/EUR and AUD/GBP consolidated, and while the AUD lost ground versus CAD and CNH (-0.5%) it has risen further against the JPY. AUD/JPY (now ~100) is near levels traded last November, though, in our judgement, it is looking stretched when compared to things like relative long-term interest rate differentials.
Data wise, there are no major releases in Australia today. Rather, the NZD (now ~$0.5801) and cross-rates such as AUD/NZD (now ~1.1350) will be in the spotlight. The RBNZ meets (12pm AEST) and following a run of weak NZ data, especially the subpar Q2 GDP, another interest rate cut is looked for. The debate is centered on whether the RBNZ delivers a 25bp reduction or a larger 50bp move. Interest rate markets and economists are split. 15 of 25 surveyed analysts are predicting a 25bp decrease with the others forecasting a 50bp cut. Interest rate markets are pricing in ~35bps of easing at today’s RBNZ meeting.
This means a burst of NZD (and AUD/NZD) volatility is probable around the RBNZ. For example, if a 25bp cut is announced the NZD could rise initially in knee-jerk fashion as rates markets adjust (and AUD/NZD might dip after its strong run). By contrast, a 50bp move could see the NZD weaken (and AUD/NZD rise even further). In our opinion, a 50bp rate cut by the RBNZ looks to be the more likely outcome. The NZ economy is in a difficult spot and the level of interest rates is too ‘restrictive’. Moreover, a couple of RBNZ members already voted for a larger reduction in August, indicating the seed has already been planted among policymakers to get things moving in order to reinvigorate the sluggish NZ economy.
AUD & NZD event radar: RBNZ (Today), RBA Gov. Bullock Speaks (Fri), US CPI (15 Oct**), US Retail Sales (16 Oct**), AU Jobs (16 Oct), RBA Gov. Bullock Speaks (16 Oct)
AUD levels to watch (support / resistance): 0.6520, 0.6560 / 0.6620, 0.6660
NZD levels to watch (support / resistance): 0.5720, 0.5760 / 0.5840, 0.5890
Market Moves
Peter Dragicevich
Currency Strategist - APAC
Upcoming Events) WEDNESDAY (8th October) JPY Labor Cash Earnings (Aug) (10:30am) NZD RBNZ Decision (12pm) EUR Germany Industrial Production (Aug) (5pm) THURSDAY (9th October) USD Fed’s Musalem Speaks (12:20am) USD Fed’s Barr Speaks (12:30am) GBP BoE’s Pill Speaks (2am) USD FOMC Minutes (5am) USD Fed’s Kashkari Speaks (6:15am) USD Fed’s Kashkari Speaks (7:30am) GBP BoE’s Mann Speaks (7:30pm) EUR ECB’s Villeroy Speaks (9:25pm) EUR ECB Meeting Minutes (10:30pm) USD Fed Chair Powell Speaks (11:30pm) USD Initial Jobless Claims (11:30pm)** FRIDAY (10th October) USD Fed's Barr Speaks (3:45am) USD Fed’s Kashkari & Barr Speak (4am) AUD RBA Gov. Bullock Speaks (9am) USD Fed’s Daly Speaks (12:40pm) CAD Jobs Report (Sep) (11:30pm) SATURDAY (11th October) USD Fed’s Goolsbee Speaks (12:45am) USD Uni. Michigan Sentiment (Oct P) (1am) USD Fed’s Musalem Speaks (4am)
*Note, all times/dates provided are AEST
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