US politics and trade war remain in focus. Modest risk off tone prevailing. But NZD gains after Orr speech yesterday

Markets are seeing a mild risk-off tone prevail with lower US equities and Treasury yields, as the week draws to a close, with US politics and the US-China trade war remaining the key themes.

Currency movements have been modest, but notably the NZD has sustained the run-up seen after Governor Orr’s upbeat speech yesterday.

The threat of impeachment continues to overhang President Trump and remain a distraction for some time yet. The whistle-blower’s account of Trump’s controversial call to Ukraine’s President was released and looked pretty damning, with the White House accused of covering up the call. The whistleblower alleges that White House officials said internal lawyers debated how to handle the details of the call, due to the “likelihood… that they had witnessed the president abuse his office for political means”. The whistleblower recounted being told that White House officials restricted access to details of the presidential call by storing the information in a specially classified storage system. Trump and his supporters are questioning the credibility of the whistleblower’s account, while House Speaker Pelosi she that she hasn’t set a timeline for any potential impeachment vote.

If that wasn’t enough to put a dampener on markets, soon after the US open, hopes for better US-China trade relations remained low after a US government official said that the US is unlikely to extend a waiver allowing American firms to supply Huawei.  Furthermore, the government isn’t ruling out additional punishments for allies that refuse to ban Huawei equipment in 5G networks, in addition to potentially cutting them off from intelligence-sharing agreements.

With that backdrop, the S&P500 has spent most of the session in negative territory and is currently down 0.1%. US Treasury yields are lower across the curve with a slight flattening bias, with the 10-year rate down 5bps to 1.69%. US trade data showed a jumped in imports as companies brought forward orders to beat the imposition of fresh tariffs on goods from China. Stronger-than-expected pending home sales added to the run of stronger housing market data. The third estimate of US GDP for Q2 was unrevised at an annualised 2.0%, but the core PCE deflator was revised up to 1.9%, from 1.7%. Fed Vice Chair Clarida said that the US economy is operating at close to its twin goals for maximum employment and price stability, with inflation “running close to our 2% objective”. Notwithstanding the lingering global risks, the recent run of US data seems more consistent with the Fed’s characterisation of rate cuts as a mid-cycle adjustment than a full-on easing cycle as the market still believes.

The USD remains bid, but currency movements have been modest. The NZD has been a notable outperformer. While flat since the NZ close, it is the only major to make gains against the USD since this time yesterday, up 0.4% to 0.6300, after sustaining the gain made after RBNZ Governor Orr gave an upbeat speech yesterday afternoon. He said that he was pleased with the outcome of August rate cut. Whereas in August he was keen to play up the possibility of negative rates and unconventional monetary policy, he gave a more circumspect perspective, saying “we are currently thinking hard about these questions…as a precaution. Our current view is that we are unlikely to need ‘unconventional’ monetary policy tools. “

Earlier in the week we noted the record net short speculative positions in the NZD based on CFTC data, setting the scene for a possible contrarian bounce on any positive news. The NZD bounce should be seen in that context.  We saw a similar movement after the OCR review which wasn’t sustained. The “news” content of both the OCR Review and Orr’s speech was both fairly minimal, but heavy short positioning is apt to create some additional volatility.  The course of the NZD over the rest of the year is more likely to be determined by developments in the US-China trade war than any NZ monetary policy tweaks.

The NZ rates market reaction to the speech was fairly minimal. While OIS rates were nudged slightly higher, the 2-year swap rate closed the day unchanged at 0.96% while the 10-year rate was up 2bps to 1.23%, the latter reflecting upside pressure from the previous night’s sell-off in US Treasuries.

With only small changes in other currencies from this time yesterday, the NZD is higher on all the crosses. Of the majors, GBP and EUR are on the softer side of the ledger, with the latter making a fresh multi-year low of 1.0922. With the UK Parliament sitting again, the Brexit circus continues, with little progress made as to its likely resolution.  GBP threatened to break below 1.23 overnight, before recovering a touch to 1.2330.

In the day ahead, the focus tonight will be on the US core PCE deflator for August, with the annual increase more likely to come in above expectations after the upward revision to Q2 data.