Financial markets have been quiet overnight with minor changes in equities, bonds and currencies, not helped by a lack of data and news headlines. The NZD has trended higher overnight but at a pedestrian rate of 2-3pips per hour for a gain of 30pips to 0.6420.
After we went to print yesterday, Boris Johnson got majority support for his Withdrawal Agreement Bill, the first time the House has formally approved a Brexit plan. But he lost the vote to ram this legislation through by the 31 October deadline. We await the EU’s decision on an extension to the Brexit date, with the debate being whether it will be short or extend through to 31 January (with the option for an earlier departure if UK legislation on Brexit is passed). There is no doubt that the EU will grant an extension, with a decision currently planned for Friday, although this could slip to Monday if there isn’t full agreement. Bulgaria’s PM summed it up nicely in saying “we’ll write ‘postpone’, and ‘postpone’ and ‘postpone’, and we’ll keep on like that for another 90-100 years”.
Debate on the Bill is now on hold and there is still the question of what amendments might be introduced, which means that we remain far from any resolution to the Brexit circus. The bottom line is that the fog of Brexit remains, although support for the Bill in principle further reduces the odds of a no-deal Brexit. A soft Brexit, no Brexit and a snap general election all remain in the mix. The Labour Party said that it is willing to back an election if the risk of no-deal Brexit is removed. All roads lead to more GBP volatility as uncertainty about the outlook reigns supreme, but ultimately the most likely scenarios are still GBP-positive. GBP has had a quiet night and currently sits at 1.2880.
Other currencies haven’t seen much movement either. The NZD is back up to 0.6420 after probing sub 0.6400 levels late afternoon in local trading hours. AUD hasn’t kept pace and is flat at 0.6850, maybe not helped by closing of short NZD/AUD positions and another article by RBA-watcher Terry McCrann, who lays out the case for the RBA keeping rates steady rather than cutting rates further. NZD/AUD has nudged up to 0.9375.
In the rates market, the US 10-year has traded a narrow 1.73-1.76 range overnight. It did fall 4bps after the negative vote on Boris Johnson’s fast-track plan for Brexit and this flowed through into the local rates market, which saw a reversal of the previous day’s bearish tone. NZ’s 2-year swap rate fell 4bps to 0.97% while the 10-year rate fell by 7bps to 1.39%.
MNI reported an interview with RBNZ Assistant Governor Hawkesby who was said to be “very happy” with the way in which interest rate cuts are feeding through into the economy, lowering borrowing rates and keeping the NZD low. And the way the article was written Hawkesby seemed quite joyous about the evident rise in house prices. Mark your calendar for further easing of LVR restrictions at the Financial Stability Report in late-November to help stoke the housing market further, alongside the lower mortgage rates we’ve seen. Indeed, one can argue for an entire scrapping of macro-prudential measures (and the dis-establishment of the macro-prudential department at the RBNZ) once the new bank capital restrictions are put in place to safeguard the banking system for a 1-in-200 year risk event.
In the day ahead, the series of global PMIs will be a key focus to gauge whether global economic momentum remains to the downside or is close to an inflexion point. ECB President Draghi will be in charge of his final policy meeting and we don’t expect much action. He’ll no doubt call for some help in the form of fiscal stimulus to support growth and inflation, while for monetary policy itself some more detail on the €20bn per month QE restart should be provided.
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