The USD is broadly stronger and UST rates are higher, following the bipartisan debt ceiling agreement.
Overnight, the NZD has added to losses seen during the local trading session, taking it down to just over 0.67.
Yesterday morning, President Trump announced that a bipartisan deal had been struck with congressional leaders to extend the debt limit for two years and allowing an increase in federal spending. The agreement is expected to pass both the House and the Senate later this week. While it helps prevent another episode of brinksmanship, it also effectively extends the period of trillion-dollar plus fiscal deficits – avoiding a tightening in fiscal policy, but ultimately adding to the concerns about the sustainability of the US government’s fiscal position.
The debt and spending deal eliminated the risk of the US government missing an interest rate payment ahead and the Fed might well take on board the effective easing in fiscal policy relative to baseline. The market took away about 3bps worth of easing in the year ahead that was priced into the Fed Funds curve and interest rates are slightly higher across the curve. The 10-year Treasury rate is up 3bps to 2.07%, going against the grain of slightly lower rates across Europe.
The USD has shown broadly based gains, with USD indices up in the order of 0.4%. US economic data were on the soft side, with existing house sales missing estimates and the Richmond Fed manufacturing index was a shocker, falling sharply rather than recovering prior losses. These second-tier releases had little impact on the market.
The NZD has been the worst performer over the past 24 hours, down 0.9% and approaching 0.67.
In addition to USD strength, the NZD fell after Bloomberg reported a response by the RBNZ to an OIA request for work on non-standard policy measures. The RBNZ reported that “This year the Reserve Bank has begun scoping a project to refresh our unconventional monetary policy strategy and implementation. This is at a very early stage”. We wouldn’t read anything into this report – it is a piece of work the Bank should arguably have completed years ago, when nominal interest rates hit fresh lows and making it patently obvious that the zero lower bound was at threat whenever the next recession hits the economy. However, the currency market seems to have read an underlying policy message into the statement that seems unjustified. This might just reflect short-term positioning after a strong run by the NZD. The rates market was unmoved by the report, with OIS pricing still consistent with a terminal OCR rate of around 1%, and if that played out then no unconventional monetary policy would be required. NZ government rates were down by 2bps across the curve while swap rates fell by 1-3bps, but we’d put these down to global forces.
The NZD is down on all the crosses. USD strength saw the AUD flirting with sub-0.70 levels again, but NZD/AUD is still lower, down to 0.9575. GBP and CAD have fallen least against the strong USD. More (mild) upside pressure in oil prices has supported CAD.
GBP is down by only 0.2% to 1.2450, coming to little harm from Boris Johnson winning the Conservative party vote to become the new UK Prime Minister, with the result widely anticipated. Johnson won twice as many votes as Jeremy Hunt. His acceptance speech reiterated his goal of getting Brexit done on 31 October. His grip on power will be weak, given the status of a minority government and a number of Ministers immediately resigned following the announcement. In our view, Johnson’s desire to push for Brexit, deal or no deal, increases the chance of an early general election and some possibly nasty GBP outcomes. Further overnight losses in the NZD sees NZD/GBP push down to 0.5385. With EUR slipping down to 1.1150 EUR/GBP is down 0.3% to 0.8960.
In other overnight news, the IMF nudged down its global growth forecasts by 0.1% to 3.2% for this year and 3.5% next year, making 2019 the weakest since the GFC in 2009. It cited adverse developments including further US-China trade tariffs, US auto tariffs, or a no-deal Brexit that “sap confidence, weaken investment, dislocate global supply chains, and severely slow global growth below the baseline”.
Consistent with the positive US-China trade vibe we noted yesterday, on Monday US negotiators, including US Trade Rep Lighthizer, are to head to China for face-to-face talks, the first high level talks since Xi and Trump met at the end of June.
On the economic calendar ahead, global PMI data due tonight will be closely monitored to see if there are hints of some stabilisation, after a weak run.
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