The USD has reversed course after its post-FOMC rally, and is now back to pre-FOMC levels.
The NZD hasn’t benefited from USD-weakness, falling in sympathy with the AUD after the Australian unemployment rate ticked higher. US rates are slightly lower for the day.
The modest USD strength seen after the “hawkish cut” from the Fed yesterday has completely reversed, with USD indices down 0.2-0.3% for the day. US existing home sales were stronger than expected, continuing the streak of better than expected data coming from the housing market. The Philly Fed headline index underwhelmed, but the detail of the report was much stronger. But these releases had little impact on the market.
GBP is the strongest of the majors, up 0.6% to 1.2540, on a continuing positive Brexit vibe. This sees NZD/GBP down to 0.5030, its lowest level in four months and well down from the late-July peak of 0.5470. EC President Juncker told Sky News that he thinks a Brexit deal can be reached by 31 October, “I’m doing everything to have a deal, because I don’t like the idea of no deal”. Importantly he added that “If the objectives are met, all of them, then we don’t need the backstop”, a reference to the Irish backstop which remains the thorniest issue to resolve. The next focal point is the Supreme Court’s ruling on the UK suspension of Parliament due early next week. NAB’s UK strategist Gavin Friend suggests that if the Supreme Court rules against the UK government, then things could get a lot uglier. In that case, Parliament will be recalled and one couldn’t rule out a confidence vote against the government.
The Bank of England left policy unchanged. The policy outlook is driven by how Brexit evolves, with a wide range of possible paths for the economy over the coming years. The minutes suggested that a policy response to a no-deal Brexit wouldn’t be automatic, while a smooth departure would likely see a series of gradual and limited rate hikes over the next few years.
USD/JPY is down 0.5% to just below 108, a combination of USD weakness and a hint of yen strength after the BoJ kept policy unchanged. Governor Kuroda hinted of further easing measures at next month’s meeting but there’s a good chance he is just buying some time. A further lurch into negative territory for the BoJ policy rate is possible, but this could be self-defeating, with opposition from the trading banks, given the impact of negative rates on their profitability. The Bank will “re-examine” economic and price developments after the sales tax goes up on 1 October, but the BoJ’s possible policy options are severely constrained.
The AUD is at the bottom of the leaderboard, falling as low as 0.6780 yesterday, but regaining the 0.68 handle overnight. Australian employment was stronger than expected in August, but not enough to absorb the increased number of jobseekers, so the unemployment rate nudged up to 5.3%. The data suggest further stimulus is required from the RBA to achieve full employment and return inflation to the target range. We expect the next rate cut to be in November, but the risk has risen of this being brought forward to next month.
NZ Q2 GDP was at the stronger end of expectations, albeit matching RBNZ expectations at 0.5% q/q, and still taking annual growth down to a 5-year low of 2.1%. The NZD was bid higher after the report, but the 20pip blip proved fleeting and it was later dragged down by a weaker AUD. The NZD made a few forays just below 0.63 but is holding up above that level this morning. NZD/AUD rose 50pips to above 0.93 after the Australian employment report, but has since receded to about 0.9270.
US Treasury yields have nudged a little lower, with the 10-rate rate down to 1.78% after reaching as high as 1.81% in the aftermath of the FOMC announcement. Funding stresses remain evident in US money markets, with the Fed injecting another $75b into the market to bring short term rates down. This remains a short-term fix, with the Fed needing a more permanent solution like rebuilding its balance sheet to facilitate an increase in bank reserves to reduce the number of these sorts of episodes.
NZ rates were dragged down by Australian rates yesterday, with a flattening bias. The 2-year swap rate fell by 3bps to 0.97% while the 10-year rate fell by 7bps to 1.27%. The domestic focus turns to the RBNZ OCR review next week, with the Bank widely anticipated to keep policy steady after the shocking 50bps cut last month. Around 4bps of cuts is priced for next week’s meeting, with most anticipating that the next rate cut will be saved until November.
In other news, oil prices seem to be consolidating, with Brent crude trading around USD64 per barrel. Trump said that a peaceful solution with Iran would be good, but it’s possible that that won’t happen, “you may have some very strong hit, we’re the strongest military in the world by far”. Iran’s foreign minister continued to claim that Iran wasn’t involve in the attack on Saudi oil production facilities and that “we don’t want to engage in a military confrontation” but a military strike on Iran would be “all-out war”.
The day ahead looks to be a quiet one.