Market sentiment has improved slightly, helped by the PBoC’s actions yesterday, while the US-China trade war remains in focus.
US equities are stronger and UST yields are slightly higher across the curve.
The NZD has lost all its post labour market data strength, while CAD has been the worst performer, playing catch-up to market movements after a public holiday.
At first, yesterday looked like another bad day in the US-China trade war after the US Treasury designated China as a “currency manipulator”, no doubt at the behest of Trump. But the PBoC’s actions helped save the day and risk sentiment is looking a bit better.
The currency manipulator label is a symbolic and political move and ratcheted up the US-China trade war to a higher level. The Treasury said that Secretary Mnuchin will engage with the IMF “to eliminate the unfair competitive advantage created by China’s latest actions”. The irony here is that IMF figures (published in Treasury’s last report on currency manipulation in May) showed CNY to be remarkably close to fair value, while the US is already “punishing” China more than any possible IMF sanction would deliver. And anyone with half a brain realises that while the PBoC probably did manipulate its currency to the weak side many years ago, more recently it has been manipulating its currency towards strength, not weakness, against prevailing market forces. If CNY was a free-floating currency, we’d expect at this point in the cycle for USD/CNY to have an 8 rather than 7 handle.
Any possible market fallout from the currency manipulator label was forestalled after the PBoC announced plans to sell 30b of yuan bills in HK next week, draining some liquidity and discouraging short-sellers in CNH, and it followed that up by setting the CNY reference rate stronger than the market expected. These were signals that the PBoC was controlling the extent of downward market pressure on CNY and trying to avoid the impression of CNY being a one-way bet. Last night Bloomberg reported that the PBoC had earlier in the day convened a meeting with some China-based foreign export companies to discuss recent movements in the yuan. It reassured the exporters of its “consistent and stable” policy around the yuan and that the government has never used the exchange rate as a weapon in the trade war – it was a normal reaction for the USD to strengthen against the yuan. They were told “the yuan won’t weaken significantly in the future”.
The US-China trade war looks to be an ongoing theme in the months ahead, even with Trump’s economic advisor Kudlow attempting to send out a more positive vibe. He told CNBC that “The reality is we would like to negotiate…we’re planning for the Chinese team to come here in September. Things could change with respect to the tariffs.”
The PBoC’s actions have helped support the yuan, with USD/CNY down from a peak of 7.0585 to 7.0255 while USD/CNH is down from a peak of 7.1400 to 7.0565. While the Euro Stoxx 600 fell again, albeit just 0.5% overnight, the US S&P500 is currently up strongly at +1.3%. The US 10-year Treasury rate pushed up a few basis points during the NZ trading session and has been range bound around 1.74-1.76% overnight.
Fed President Bullard became the first FOMC member to publically comment since the trade war escalated and despite his uber-dovish tendencies his message was one of wait-and-see than an urgency to slash rates. He commented that “US monetary policy cannot reasonably react to the day-today give-and-take of trade negotiations”. While he didn’t rule out more policy changes ahead he noted that Fed policy was considerably more accommodative than late 2018.
The NZD sits this morning around 0.6525, losing all its gains after much strong labour market data were released – the unemployment rate fell to an 11-year low, driven by stronger employment growth, while a number of wage indicators were unambiguous in showing rising inflation pressure. Against a backdrop of growing global risks, the spike in the NZD to 0.6587 didn’t seem justified and it didn’t take long for gravity to take over. Later in the day, two-year inflation expectations measured by the RBNZ’s survey fell to a 2½-year low of 1.86%. The 2.7% fall in the GDT dairy price index overnight was broadly in line with expectations.
NZD/AUD spiked up to a fresh high of 0.9740 and is back to roughly unchanged for the day at 0.9650. The RBA’s policy update was in line with market expectations – taking a pause after two back-to-back rate cuts but maintaining an easing bias. The statement formalised previous comments made by Governor Lowe that “it is reasonable to expect that an extended period of low interest rates will be required”.
Of the majors, CAD has been the worst performer overnight, with USD/CAD up 0.6% to 1.3285 for the day. Canadian interest rates plunged (10-year rate down 15bps to 1.22%) as the market played catch-up to recent events after a public holiday, and this flowed through into the currency market.
Better risk sentiment sees USD/JPY up 0.6% to 106.55, with the gains coming during the NZ session, and some stability overnight. EUR and GBP are flat for the day. There was no market reaction to surprisingly strong German factory orders for June. The data follows a weak run, so it is too earlier to bring out the champagne, with the trade war escalation dampening any expectation that a turning point might have been reached.
In the day ahead, focus turns to the RBNZ’s Monetary Policy Statement this afternoon, where a 25bps cut to the official cash rate and maintaining an easing bias are widely expected. Interest will lie in forward guidance, particularly how low the RBNZ is prepared to take rates and what other measures the RBNZ will be considering as rates approach the lower bound. There was a bit of price action in the rates market yesterday, but it all netted out to not much change for the day for the swaps market.