Markets have begun the second half of the year on a positive note, supported by positive economic indicators. The Euro Stoxx 600 was up 1.1% while the S&P 500 index closed a shortened session before the Independence Day holiday up 0.2%. Global bond rates continued to nudge higher, while the USD was stronger across the board.
A range of business surveys pointed to the global economic recovery extending. Japan’s Tankan survey showed improved confidence among large manufacturers for a third straight quarter, driven by exports. In the euro area, the final PMI estimate was slightly upgraded from the flash estimate to a 6-year high, while the unemployment rate remained at an 8-year low. The US ISM manufacturing index was much higher than the consensus, reaching an almost 3-year high, backed by strong new orders and employment components. The only exception to the positive vibe was the UK manufacturing PMI falling by more than expected to a 3-month low, as Brexit negotiations get underway.
The USD major currency index is up 0.5% with gains on all the major crosses. At the end of the June quarter, our USD model suggested that the currency on a TWI basis was oversold by over 5%. This was the most extreme level in over five years, suggesting the USD is well overdue for a recovery.
The yen has continued to underperform, as global bond rates tick higher, with USD/JPY up 0.9% to 113.40. In Tokyo’s elections over the weekend, the ruling LDP party put in a poor performance, not a good sign for the continuation of “Abenomics”. The vote was seen as a barometer of opinion as Japan faces a general election by the end of 2018. NZD/JPY is up to its highest level since January at 82.7.
EUR and GBP are both about 0.6-0.7% weaker to 1.1360 and 1.2940 respectively, with the strong USD in the driving seat. Yves Mersch, a member of the ECB’s executive board, noted that “we need to have patience” with its accommodative policy stance but added that “we don’t necessarily have to wait for prices to reach 2 percent before adjusting monetary policy.” This followed the Bundesbank’s Weidmann commenting on the positive economic backdrop and suggesting that the ECB “lift one’s foot off the gas a little.”
The NZD has fallen to around 0.73 against a stronger USD backdrop. Over the past week or so the currency has found it difficult to break through 0.7350 and we see the balance of risk through Q3 as weighed towards the downside as better US data support a USD recovery. NZD/AUD has largely tracked sideways around 0.9530, with AUD/USD down to around 0.7650. Eyes will be on the RBA later this afternoon as it releases a policy update. Markets will be focused on whether the language in the Statement follows the seemingly coordinated hawkish comments by central banks recently. In our view the RBA is unlikely to adopt a hawkish tone, given still elevated labour market slack and subdued inflation. But given the recent chorus of other major central banks, the market will be looking for hints of a hawkish tilt even if that isn’t the RBA’s intention.
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