The week has begun on a quiet note, with a lack of news headlines and the US bond market closed for Veteran’s Day holiday. GBP and NZD lead the way in currency markets.
US equities have begun the week on a slightly softer note as markets digest Trump’s comments at the end of last week about not agreeing anything yet on the trade deal, hosing down some market optimism. Also not helping market sentiment, during Asia trading the Hang Seng fell 2.6% and China’s CSI 300 Index fell 1.8%, after more chaos in Hong Kong following the police shooting of a protester.
There has been little overnight news to drive markets, apart from Brexit Party leader Farage saying that he wouldn’t stand candidates in the 317 electorates that the Conservatives won at the last election in 2017, to help boost the chance of Boris Johnson winning a majority government at the 12 December election. The move is aimed to avoid a split of the pro-leave vote and thereby reduce the chance of a second referendum to cancel Brexit. But some say that this move won’t be of much help as the Brexit party will still be contesting seats the Conservatives hoped to win that are currently held by Labour or the Liberal Democrats. However, GBP liked the news and spiked up to just under1.29 before meeting some resistance. It is currently up 0.7% to 1.2860. Earlier, there was little market reaction to economic data showing that UK GDP in Q3 was a slightly softer-than expected 0.3% q/q. This took annual growth down to 1.0%, the weakest in nearly a decade, driven by weaker business investment, not surprising given the fog of Brexit. Industrial production was also on the soft side.
Late yesterday, credit growth in China was weaker than expected in October, even allowing for usual seasonal effects, signalling a lack of credit impulse to help support growth, which is likely to promote further easing in PBoC monetary policy. The data also reflects the de-risking of the financial system, with a reduction in “shadow banking”.
The NZD has been the only other key currency mover, up 0.6% for the day to 0.6365, a modest bounce after last week’s inexplicable underperformance in light of the stronger CNY, higher risk appetite and further evidence of higher NZ commodity prices. In our weekly currency update we suggested that some nerves ahead of Wednesday’s RBNZ Monetary Policy Statement might have been responsible, which is looking like a finely balanced decision between no change in rates and a 25bps cut. We also noted that since August our short-term fair value model estimate has risen by 4 cents to 0.69, driven by improving fundamentals, a period in which the NZD has largely tracked sideways. This has taken the “cheapness” of the NZD to its greatest level in a decade on this model. Net speculative short positioning remains near a historical high, further evidence of how unloved the NZD is at present. A rate cut might only have a short-lived negative impact on the currency and removal of this risk event could pave the way for a stronger NZD into year-end and close the gap to fair value.
AUD is down 0.1% to 0.6855, seeing the NZD/AUD cross up 0.7% to 0.9290, after reaching its lowest level in a year last week. The NZD is up on all the other crosses as well, apart from ticking lower to 0.4950 against GBP.
The NZ rates curve showed little movement yesterday, with a rise of 1bp across much of the government bond and swaps curves. OIS pricing for November closed at 0.85%, suggesting the market is 60% priced for a rate cut on Wednesday. The NZIER’s shadow board joined the chorus arguing that policy should remain unchanged at 1.0%, with a slight majority arguing for higher, not lower rates – highlighting the recent pick-up in house prices, and the financial stability risks that stem from interest rates being too low.
Today sees the release of the RBNZ’s 2-year inflation inflation expectations figure, which could nudge lower, given soft headline CPI inflation and the ANZ survey’s 1-year-ahead measure has been drifting lower. The market might be unusually sensitive to the release ahead of tomorrow’s RBNZ MPS, even though it is a lagging indicator with a tiny, unrepresentative sample. The global calendar remains light ahead of more important releases later in the week.