Newsflow has been lacking at the start of the new week. The USD continues to drift lower, with the commodity currencies showing some of the best, albeit moderate, gains. US equities are flat while global rates have nudged lower, reversing Friday’s move higher.
It could be a quiet week in financial markets as we all await the outcome of the Xi-Trump meeting at the G20 summit at the end of the week. It’s no time to “swing the bat” and make a big call on the outcome, but there is some hope that fresh tariffs against China won’t be imposed and the two sides agree to progress on further trade talks.
As promised, President Trump imposed further sanctions against Iran, including penalties that would deny Iran’s supreme leader Ayotollah Ali Khamenei access to financial resources. The move is largely symbolic as the country already faces harsh economic sanctions. Oil prices haven’t really reacted to the move.
The economic calendar is bare but the two business surveys that were released continue to point to softer economic momentum in Germany and the US. Germany’s IFO index – a measure of business confidence across a number of sectors – fell to a 5-year low, but was largely in line with expectations. The US Dallas Fed manufacturing index fell and was worse than expected, following on from the misses from the Empire and Philadelphia Fed gauges. All roads lead to a weak ISM manufacturing index when released at the beginning of next week. Recall that Markit’s manufacturing PMI, released at the end of last week, fell to a 9-year low. This indicator has a better relationship with the actual economy than the ISM version but for some odd reason its shorter history means that the market pays less attention to it.
US equities have begun the week on a flat note, while the US 10-year rate is down 3bps to 2.02%, reversing Friday’s move up in yield. European rates show the same pattern.
The USD continues to head lower, although falls to begin this week have been modest, with the indices we follow down about 0.1-0.2%, given a lack of movement in GBP and JPY. EUR touched 1.14 for the first time since March. The commodity currencies have been some of the better performers. The NZD trades sits this morning at 0.6620, up 0.5% from last week’s close, while the AUD is up 0.6% to 0.6965. The USD remains vulnerable if the Fed is about to embark on a significant easing cycle to the extent the bond market expects. On a long-term fundamental basis, the USD is over-valued against all major currencies, with the DXY Index some 16% above our purchasing power parity estimate. Net speculative positioning in the USD has been long for some time and an unwinding of positions would add to USD weakness.
The AUD got some support yesterday after RBA Governor Lowe, in a panel discussion, argued that monetary policy transmission mechanisms “are weaker at the moment”. He noted that if everyone is easing monetary policy then the effect “from exchange rate depreciation isn’t there” and other transmission mechanisms “are weaker at the moment”. He argued that nations needed to focus on fiscal policy and structural forms. This all makes complete sense, but with governments not on board with his suggestion, then monetary policy is the only tool left to do the job of lifting growth and inflation.
NZ rates showed modest increases across the bond and swaps curve yesterday, in response to the upward pressure on global rates Friday night. Trading will remain quiet ahead of tomorrow’s RBNZ OCR Review. The economic calendar ahead of that remains light. US Fed chair Powell will be on the wires early tomorrow morning.