Market sentiment ended the week on a softer note, with the US-China trade war at the centre of attention. Equity markets were weaker, with the S&P500 falling 0.7%, while US Treasury 10-year rates nudged higher, closing a volatile week.
The NZD and AUD weakened Friday night, but the GBP was the biggest loser after data showed the economy contracted in Q2.
The US-China trade war remained forefront of mind on Friday night after President Trump gave the impression he didn’t care whether or not US-China trade talks continue. He said “We’ll see whether or not we keep our meeting September…if we do, that’s fine. If we don’t, that’s fine”. There was also some market confusion after Trump said “we’re not doing business with Huawei”, but the White House later clarified that he was only referring to the ban on Federal Departments buying from Huawei. Bloomberg reported that the White House is holding off on a decision about licences for US companies to restart business with Huawei after Beijing said it was halting purchases on US farming goods..
Weaker UK GDP data got the market’s attention as it showed GDP unexpectedly contracted in Q2, albeit not helped by the unwinding of stockbuilding by companies ahead of the original 29-March Brexit deadline and earlier-than-usual car factory shutdowns in April. Still, the data suggested a weak economic backdrop ahead of potential chaos and further economic contraction if a no-deal Brexit proceeds from 31-October. GBP was the weakest of the majors, falling 0.8% to close around its low for the session at 1.2030, its weakest level since early 2017.
During local trading hours, Japan’s GDP report for Q2 was stronger than expected, but this was largely brushed off ahead of the escalation of US-China trade tensions and the still-planned sales-tax hike. USD/JPY fell 0.4% to 105.70, a reflection of the weaker risk sentiment backdrop, with the GDP report having no market impact.
Other currency movements were fairly well contained. USD indices were down a touch. In US data, core producer prices unexpectedly fell for the first time in over two years in July, adding to the case that US inflationary pressures are fairly muted. Trump was asked whether he would undertake currency intervention to weaken the dollar he replied, “No, we don’t have to”. He noted that the Fed could achieve a weaker dollar and said that he would like to see the Fed lower rates by a percentage point.
CAD was volatile around its employment report release but was flat for the session. Weaker Canadian employment sent the unemployment rate higher to 5.7%, against expectations but market reaction was muted to the extent that annual wage inflation rose to a decade-high rate of 4.5% y/y.
The NZD was stronger during the local trading session as the market digested the plethora of headlines hitting the screens based on senior RBNZ official giving post-MPS speeches. Governor Orr’s comments, as reported by Bloomberg, were optimistic, as he talked of the “great starting position” for the NZ economy as global risks mount, with stimulatory monetary and fiscal policy, high terms of trade and the exchange rate at a competitive level. He said that the discussion of negative interest rates is acknowledging the possibilities “within a confidence interval three-plus years ahead”.
The NZD met some resistance just under the 0.65 mark, before trending lower through the US trading session to close the week just under 0.6470 – near the middle of the wider-than-usual 2-cents range for the week. After flagging downside risk to our NZD forecasts at the beginning of the week after the trade war escalated, we slashed our year-end target to 0.62. This is based on the tight relationship between CNY and the NZD since the trade war began early last year and our expectation that the PBoC will allow the yuan to continue to depreciate, taking USD/CNY to 7.40. We also slashed our AUD forecasts, leaving NZD/AUD projections little changed, targeting 0.93-0.94 late this year, early next year.
NZD/AUD hovered around 0.9530 through Friday’s session. RBA Governor Lowe spoke to a Parliamentary committee and reiterated that the Bank was prepared to ease further if needed and that interest rates were likely to remain low for an extended period. Lowe said that the Bank has scope to cut twice more, taking to cash rate to 0.5%, at which point it would consider unconventional policy, most likely to take the form of buying government securities. He noted that the cash rate could reach zero in scenarios where either all other central banks were cutting to zero, and/or the economy materially underperformed.
US 10-year rates ended the week nudging higher, up 3bps to 1.74%. This capped off a volatile week, which saw it trade a wide 26bps range. Italy’s bond market extended losses after the government’s call for a new election after it lost its majority. Italy’s 10-year rate rose to 1.80%, taking its gain for the last two trading sessions to about 40bps. Currency markets don’t seem bothered by yet another election, with EUR nudging back up to 1.12.
NZ swap rates showed only small changes on Friday, but capping off a big week which saw rates down 22-26bps across the curve. NZ’s 10-year government rate nudged down further to a fresh record low of 1.08%, down a chunky 28bps for the week.
The economic calendar is light to begin the week. Highlights for the week ahead will be China monthly activity and credit data, US CPI and retail sales data, European GDP data and Australian labour market data.
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