It has been a deadly quiet start to the week, as expected. US equities are slightly higher, US rates are slightly slower and currencies are treading water.
There have been no economic releases of note and newsflow is light to start the week. Still, we have dug out two positive news stories doing the rounds – the vibe around US-China trade talks is positive and the US debt ceiling issue might soon be resolved.
Chinese state media report that face-to-face negotiations between top Chinese and US negotiators could happen soon. The media noted some goodwill gestures on both sides, including the US pushing to allow US companies to supply Huawei with technological goods. The Chinese government met with domestic soybean buyers about a plan to purchase more US supplies, including wavering China’s retaliatory tariffs on the goods.
On the debt ceiling issue, a number of media outlets reported that White House and congressional negotiators are closing in on terms for an agreement to set new spending levels and increase the government’s borrowing limit. It would suspend the debt limit for two years. Previously, Treasury Secretary Mnuchin has said the US could run out of cash in early September, before lawmakers return from a summer recess, pressing negotiators to reach an agreement this week.
There has been little market reaction, although US Treasury rates are slightly lower. The 10-year rate is down 1½bps to 2.04%. Trading conditions should remain quiet until the ECB’s policy meeting Thursday night, and the market will also have next week’s FOMC meeting in its sight as well. Expectations have solidified that the Fed will kick off an easing cycle with a 25bps cut. The 30bps cut priced into the market might well reflect expectations that the interest rate on excess reserves will be cut by a greater 30bps, to keep the Fed Funds rate closer to the middle of the new range. NZ rates were little changed in yesterday’s trading session.
The NZD has started the week trading in a 30pip range, with an upward bias, continuing to remain in favour. The AUD has followed a more sideways path around 0.7040, which sees NZD/AUD nudge up to 0.9620. While the cross has displayed a slight upward trend over the past few months, we can’t see any good fundamental reason why that should be the case. Our short-term fair value estimate is closer to the 0.93-0.94 mark, where we expect it to gravitate towards heading into year-end. Technicals show 0.9730 as a key level of resistance.
EUR/USD has traded in just an 18pip range around 1.1215, exemplifying the current low volatility environment and level of boredom facing a currency strategist at present. Fun fact of the day, if the tight range continues into the NY close, it will be the second narrowest daily range ever (excluding 1 January and Good Friday readings).
There’s no need to drag out this report any longer than it should be. On a final note oil prices remain well bid (up over 1%) as tensions with Iran continue. Iran said that it would execute a group of alleged CIA-trained spies that had been rounded up earlier this year. An Iranian intelligence ministry official said that the alleged CIA spies worked in military and nuclear facilities and added that the US had expanded its espionage operations inside Iran under Mr Trump. President Trump and Secretary of State Pompeo both claimed that Iran was lying.
The odds favour another quiet trading session ahead, with the economic calendar remaining light.
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