It was a fairly mundane overnight trading session until NY Fed President Williams brought the market to life with a dovish speech just after 6am this morning. US equities are higher, US rates have fallen and the USD has seen some broadly based selling pressure. The NZD has pushed up to a fresh 3-month high.
NY Fed President Williams has just spoken and offered some dovish comments to the market. While his speech was a big picture one titled “Living life near the ZLB (zero lower bound)” and not specifically directed towards the current policy outlook, his comments were apt to the Fed’s current predicament. He said that “when you only have so much stimulus at your disposal, its pays to act quickly to lower rates at the first sign of economic distress”, and pointing out that “investors are increasingly viewing these low inflation readings not as an aberration, but rather a new normal”.
US rates and the USD fell after the speech was reported, with the speech fuelling expectations that the Fed might kick off the easing cycle with a 50bps cut. A rate cut of 35bps is now priced for the FOMC meeting at the end of the month compared to 30bps yesterday, suggesting a 40% chance of a 50bps move. The Treasuries curve has flattened, with the 2-year rate down 3.5bps to 1.78%, while the US 10-year rate trades flat at 2.04%. Earlier in the session the 10-year rate stretched above 2.07% after the Philadelphia Fed manufacturing bounced back strongly in July after slumping in June – the same week that Trump threatened to impose tariffs on imports from Mexico.
The USD is broadly weaker, down around 0.4%, with only a soft CAD not managing to make any ground, with lower oil prices being a headwind for that currency. Oil prices are down around 3% on reduced concerns about supply, as a Russian pipeline from the country’s largest crude producer resumed full service.
Against the backdrop of a weaker USD, the NZD has pushed up further over the past 24 hours to reach a fresh 3-month high above 0.6775. As well as USD weakness being a driver, the NZD has piggy-backed alongside a stronger AUD. The AUD was bid higher after the Australian employment report yesterday afternoon. The figures in that report weren’t far off market expectations, with the unemployment rate steady at 5.2% for the third month in a row. But there was nothing in the report to demand that the RBA quickly follows with a third monthly consecutive rate cut, so the AUD was supported in that regard. NZD/AUD was as high as 0.9610 before the employment report and currently sits around 0.9590.
Support for the NZD and AUD comes even as there is lingering bad news around US-China trade negotiations. Early yesterday, the WSJ reported that progress toward a US-China trade deal has stalled while the Trump administration determines how to address Beijing’s demands that it ease restrictions on Huawei. Beijing is waiting to see what the US does on Huawei before making commitments, including ramping up purchases of agricultural goods that Trump claims China promised. Bloomberg has run a story along the same lines.
Chatter in the market continues about possible speculation that the US administration will intervene in currency markets in the USD. This is something we put a very low probability on, given the futility of such a unilateral move without the likely backing of other central banks, not to mention the lack of economic necessity to encourage growth away from the likes of the euro area and Japan to benefit the US. When asked about any change to USD policy, US Treasury Secretary Mnuchin said “this is something we could consider in the future but as of now there’s no change to the dollar policy”. While this comment had little impact on the market, it won’t stop speculation on USD intervention risks.
Of the majors, GBP is outperforming and has pushed on up to 1.2540. The House of Commons voted to prevent the next Prime Minister to suspend Parliament to pursue a no-deal Brexit, with a large number of Conservatives rebelling against the government to help get the vote through. EU Chief negotiator Barnier reiterated that the divorce deal can’t be changed – which includes the Irish backstop – though he is willing to redraft the political declaration on future ties. His reported earlier comments, which pushed GBP higher, were taken out of context where he said that the EU was ready to discuss alternative arrangements for the Irish border. As an added bonus, UK retail sales unexpectedly bounced higher in June. Despite GBP strength, NZD/GBP remains above the 0.54 mark.
NZ rates drifted lower yesterday, against a backdrop of US Treasury rates falling. The swaps curve showed some mild flattening, with the 2-year rate down 1bps to 1.33% and the 10-year rate down 4bps to 1.77%. The economic calendar is fairly light to end the week.