It has another day of lots of newsflow, and the outcome being a much weaker USD across the board. A risk-off tone has prevailed, but that hasn’t prevented decent gains in NZD and AUD.
JPY is the strongest of the major currencies following the release of an underwhelming fiscal package and a fall in risk appetite.
Equity markets are weaker across the board, with falls in the order of 1-1.5% for key indices in Europe and Japan and a 0.7% fall for the S&P500. The VIX index is back up through 14, a 3-week high.
For Japan, much was made of the size of the ¥28 Trillion fiscal stimulus package heading into yesterday’s release but new spending for current fiscal year will be just ¥4.6 Trillion, which doesn’t look out of the ordinary compared stimulus packages over the past 20+ years that have done little to drive Japan out of its deflationary spiral. USD/JPY promptly fell and is now down 1.5% at 100.90, with falling risk appetite adding to the demand for Yen.
As widely anticipated, the RBA cut its cash rate target by 25bps to a record low of 1.5%. We noted yesterday that any negative AUD reaction wouldn’t be sustained for long. That proved to be the case, with only a temporary dip in the AUD to just below 0.75 and the currency back up to pre-announcement levels within an hour or so.
The AUD has pushed on higher overnight and sits above 0.76 this morning, despite weaker global risk appetite and historically low rates across the country’s interest rate curve.
The AUD reaction and the price action of the NZD during July highlight how local rate cuts (or expectations thereof) have, or will have, little permanent impact on the currency. More than two 25bps cuts are priced into the NZ rate curve but the NZD continues to probe recent highs. It trades up 0.9% this morning at 0.7240.
The average winning price at the GDT dairy auction rose by 6.6%, with a 9.9% increase in whole milk powder. These figures sit within the +5-10% range predicted by the trading banks. Indeed the NZD reached a high of 0.7257 before the auction result was announced. The NZD should meet some serious resistance around the 0.7300-7325 level and we’d be looking for selling opportunities around that mark.
GBP has pushed up through 1.3350. Yesterday we noted that net short speculative positioning was at a record level. This provides significant upside to GBP on any good news. The construction PMI released last night was much better than expected, suggesting that activity levels haven’t fallen off a cliff, yet.
EUR is up around 1.1225, its highest level since the Brexit vote, reflecting some spillover from a stronger GBP and the lack of appetite for USD. The key USD indices are down around 0.7% over the past 24 hours.
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