New restrictions in London and France to contain spread of COVID19. US jobless claims rise. Equities fall and safe haven currencies outperform. Dovish RBA adds to weaker AUD profile

New restrictions in London and France to contain spread of COVID19. US jobless claims rise. Equities fall and safe haven currencies outperform. Dovish RBA adds to weaker AUD profile

Risk appetite has weakened, following fresh restrictions across London and France to bring the spread of COVID19 under control, and a weak US labour market reading. Equity markets have extended this week’s losses while safe haven currencies have outperformed.  The NZD and AUD are two of the weakest currencies, the latter not helped by a dovish RBA yesterday.

We jokingly called a bear market yesterday for US equities after a second consecutive decline, but today we’re on track for a third daily decline. The S&P500 index opened down 1.4% and is currently down 0.4%. The Euro Stoxx 600 index closed down 2.1%. Yesterday, the NZSX50 broke an 11-day positive streak to close down 0.5%.

Yesterday we noted that Europe had overtaken the US in new daily rates of COVID19 infection after adjusting for population, no mean feat, and this has come with fresh lockdown orders. London will move to a higher alert level from the weekend, which means a ban from households socialising with others indoors, effectively closing pubs and restaurants. Decisions are still being made on potentially other areas moving the same way. This followed news of fresh restrictions in France with nine of the biggest cities including Paris imposing a night time curfew for residents from Saturday. The restrictions add to the concern that the global economic recovery will stall until a vaccine arrives and the news earlier this week on that front wasn’t positive either.

Adding to the economic concerns, initial jobless claims last week rose to their highest level since August, against expectations for a fall. The data is consistent with the idea that the spread of COVID19 and removal of fiscal stimulus has seen a stalling of the economic recovery and a deteriorating labour market, adding to the chance that October data will show a fall in non-farm payrolls. The two regional PMIs from Philadelphia and New York released overnight showed contrasting fortunes, indicative of a patchy recovery in the manufacturing sector.

Germany’s 10-year rate fell for a sixth consecutive day, down 3bps to minus 0.61%, its lowest level since mid-March. The US 10-year Treasury rate fell to as low as 0.69%, before reversing course, to be currently little changed at 0.72%.

Lower risk appetite sees safe-haven currencies in the box seat, with the USD up in the order of 0.5%, and JPY and CHF also two of the better performers. For the day, the AUD has been one of the worst of the majors, with weaker risk appetite combining with a dovish RBA yesterday, seeing it fall to as low as 0.7056 overnight.

In a speech, RBA Governor Lowe noted that the Board was considering the case for additional policy easing, which made more sense now that the worst of the pandemic is over and the economy is opening up. In the Q&A the Lowe reiterated it was possible to cut the cash rate to 0.10% from 0.25% and that the Board was evaluating the case for outright QE in the 5-10 year space. We expect both of these policy measures to be adopted next month. In reaffirming forward guidance of low rates for a long time, he noted that the Board will not increase the cash rate until actual (not forecast) inflation is sustainably within the 2-3% target range.

The dovish speech drove Australian yields lower across the curve, with the 10-year rate down 7bps to 0.77%, its lowest level since April. These moves pushed down NZ rates across the curve with a flattening profile, with strong demand at the NZGB tender added into the mix. Rates fell as much as 4bps, with the 10-year NZGB ending the day down 3bps to 0.54%. Swap rates showed a similar move, down 1-4bps, with the bigger falls at the longer end of the curve.

The NZD is down about 1% from this time yesterday, with the bulk of the fall occurring overnight. From a low of 0.6576, the NZD is currently trading just under 0.66.  NZD/AUD broke previous resistance of 0.9330, reaching as high as 0.9343, before falling back to 0.9300. Despite the dovish RBA, we still see it nowhere near matching the RBNZ’s substantial QE programme and NZ-Australia short rate spreads can fall when/if the RBNZ takes the OCR negative, so we still think that the recent recovery in the NZD/AUD cross will prove temporary.

Against a backdrop of broadly-based USD strength, EUR and GBP are lower, with lockdown restrictions not helping sentiment either. EUR has traded sub 1.17 overnight while GBP went sub 1.28. Bloomberg reported on sources that suggest the ECB sees little reason to rush into new stimulus this month, despite fresh pandemic-related restrictions, reinforcing the idea that any decision will be deferred to December, following a quarterly update of growth and inflation forecasts. The EU leaders’ summit has begun and after tonight we will know if EU-UK trade talks will continue for another couple of weeks.

Today sees the release on the latest NZ manufacturing PMI, ahead of US retail sales, industrial production and consumer sentiment data tonight. On Saturday night we’ll know the result of the NZ general election, but polls show Labour in a commanding position and the only question being one of whether it will need the Greens to form a majority. Either outcome is inconsequential to markets.

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4 Comments

What's up with the title? "NZD goes sub 0.60"? When? Where? (Un)intentional clickbait?

0.66 presumably

Yeah I clicked on this to find out how the currency fell ~6 cents overnight and why no one else was talking about it as well.

I suspect it should say "sub 0.66" and it's just a typo.

Cool click bait, but honestly, the economic principles are all twisted the NZ$ will only increases as soon the FLP from RBNZ take into action, then further QEs/LSAP/printing money is expected by Q1 2021 along side the negative OCR - the NZ$ will can only goes up, so to the hot hot hot RE market, jump on board before loose the wealth bullet express train!