It has been another uneventful trading session, with global equities meeting resistance after pushing to fresh highs last week, seeing modest falls, small changes in currencies and small changes in global bond yields.
With Trump no longer a “shock” factor with political realities setting in, more certainty about the global economic outlook, and more consistent messaging from Fed speakers, a recent theme has been reduced market volatility. The below-average levels of the VIX index is well known, but we’re seeing the same pattern in currency and bond markets. JP Morgan’s global FX volatility index has fallen to its lowest level since the US election while the MOVE index, a gauge of expected movement in US Treasury yields based on option pricing, has fallen to its lowest level since October.
On that note, the USD is flat and the movements on USD crosses for the majors we monitor are all plus or minus 0.3% for the day. Data releases have been fairly sparse. The US trade deficit widened to its largest level in nearly 5 years, as signalled by the advanced goods trade release. A negative net exports contribution sees the Atlanta Fed Now forecast pointing to annualised US GDP growth of just 1.3% in Q1. That won’t prevent the Fed from hiking but it’s a reminder of the lower potential post-GFC growth environment we are in. A reading like that would mean that US growth would have been 2% or below for 6 of the previous 7 quarters.
The NZD remains out of favour and has slipped a little against most currencies. NZD/USD is down to 0.6980, continuing to unwind its strong gains earlier this year. Recall that the Kiwi began the year around the 0.6930 mark and was as high as 0.7235 just over a week ago. It’s been a big fall in a short space of time. The latest GDT dairy auction showing a 6.3% fall in average prices and a 12.4% fall in whole milk powder was no real surprise, but certainly anticipation of that very weak result has been a factor in the NZD’s weakness over recent trading sessions.
The AUD has outperformed a little, supported by an ongoing upbeat message by the RBA, albeit the policy statement was no surprise. The RBA now sees commodity prices providing a ‘significant’ boost to national income. This is consistent with Governor Lowe’s recent comments that it was hard to say the AUD was overvalued or too high. The AUD moved back up through 0.76, seeing NZD/AUD fall to 0.9180, an area it hasn’t probed since May last year.
NZD/EUR has slipped to just under 0.66 and NZD/JPY is down to 79.50. GBP has been relatively soft as the time to trigger Brexit nears, which sees GBP probing 1.22 and NZD/GBP holding around 0.5720.
China’s foreign currency reserves showed a rare and unexpected increase in February, nudging back above the USD 3 trillion mark. This likely reflected some success with tighter capital controls that has helped reduce the downward pressure on the yuan. That said, a Bloomberg article highlights a side effect, with corporates complaining that the tight controls make it “impossible” to invest in overseas projects. Foreign investment deals by Chinese companies have fallen by 74% on a year ago.
As reflected in the low vol environment noted above, US Treasuries remain in a tight trading range. The 10-year rate is hovering around the 2.50% level, seeing signs of consolidation after last week’s Fed-inspired increase. ADP employment data are released tonight, but employment data hold less interest than usual, given the Fed’s strong signal last week. It would take an incredible negative shock on both employment and wages to prevent a Fed rate hike next week. Such a move is around 85% priced. The only remaining event this week of interest is the ECB’s policy statement on Thursday night NZ time.
NZ’s yield curve barely budged yesterday, with movement in yields no more than 1bp. The 2-year swap rate closed at 2.34% and the 10-year rate closed at 3.55%. Manufacturing data this morning is the last piece of the puzzle ahead of Q4 GDP data next week.
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