GBP outperforms as UK-EU trade talks to resume. NZD and AUD up strongly, recovering recent losses. USD weak and UST yields higher on US fiscal talk

The USD shows broadly-based weakness, with US fiscal talks still in the headlines. The US 10-year Treasury rate hit a four-month high before peeling off. The NZD and AUD have recovered nicely, while GBP has outperformed as EU-UK trade talks look to restart, with hope for a deal by mid-November. CAD is the weakest major, not helped by a 4% fall in oil prices.

For another day, the headlines have been peppered by US fiscal stimulus comments. There is still a glimmer of hope for a US fiscal stimulus bill to be soon agreed. After we went to press yesterday, there was no deal between Treasury Secretary Mnuchin and House Speaker Pelosi, with the gap between the Democrats and the White House still notable at $2.2T vs $1.88T and still no guarantee that Senate Republicans would vote for even the lower figure, likely the key hurdle of any deal this side of the US election.

Pelosi and Mnuchin will talk again from 7:30am NZ time, with the previous Tuesday “deadline” now past. Pelosi said that agreement by the weekend would allow a bill to be passed ahead of election day. In a TV interview she said she was pretty happy about the state of relief talks and there will be a stimulus bill, the question was one of timing.

A weaker USD and higher Treasury yields are the sort of reactions one would expect with an imminent large fiscal easing. The US 10-year rate rose through the Asian trading session and pushed to just over 0.83%, its highest level since June, before attracting buyers, pushing the yield back down to 0.80%, now a touch lower compared to the NZ close. US equities have wavered between positive and negative territory, with the S&P500 currently flat.

The USD BBDXY index is down 0.6% for the day and would be weaker if not for the underperformance of CAD. Not helping CAD, oil prices are down in the order of 4% after EIA data showed the largest increase in US gasoline inventories since May, with lower consumption, the figures coming ahead of seasonal weakness through winter. Analysts report concerns about global oil demand amidst the spread of COVID19 across Europe and the US. Canada CPI inflation data were in line with expectations, but retail sales were softer than the preliminary data indicated for August. CAD is flat around 1.3125.

The strongest of the majors has been GBP, up 1.7% for the day to 1.3165. After UK-EU Brexit talks had been suspended last week, EU Chief negotiator Barnier said that a post-Brexit trade deal with the UK was “within reach if we are on both sides prepared to work constructively and in a spirit of compromise”. This followed with the UK agreeing to resume “intensive” talks from tonight, which are expected to last for about three weeks, with the goal of reaching a deal by mid-November. All this is playing to our view that, at the very least, some sort of partial deal can be agreed that would lead to further GBP strength into year-end.

The weaker USD has helped the NZD and AUD recover more than the losses seen in the wake of the dovish RBNZ and RBA commentary on Tuesday. The NZD is up 1.3% from this time yesterday to 0.6670. The AUD is up 0.9% to 0.7130, seeing NZD/AUD push higher to 0.9360.

Further supporting NZD and AUD strength, CNY showed further gains, with USD/CNY reaching its lowest level in over two years, down to 6.65, supported by China’s outperforming economy in the COVID19 world, its strong yield support, and odds of a Biden victory. Our NAB Asia-based currency strategist thinks that the strength in CNY looks overdone and the pace may be testing the PBoC’s tolerance.

EUR and JPY haven’t kept pace with the NZD recovery, seeing these crosses higher, with NZD/EUR up to 0.5620 and NZD/JPY up to 69.7.

The domestic bond market saw a higher and steeper curve, driven by the upward move in US Treasury yields during the session. The 10-year NZGB rose by 5bps to 0.58%. Earlier in the day, NZDM announced that the syndication of a new 2028 bond would likely take place next week.

The short-end of the swaps market was well supported as OIS rates drifted down another 2bps, as the market becomes more convinced that the RBNZ will cut the OCR next year. The 2-year rate swap fell a touch to 0.01% and can fall a lot further if the RBNZ takes the OCR down to minus 0.5%. Curve steepening was also evident in the swaps curve, with the 10-year rate up 4bps to 0.50%.

In the day ahead, watch out for more dovish-speak from the RBA, with Deputy Governor Debelle talking this morning. Key BoE officials are speaking tonight, where we’ll hear more thoughts on the efficacy of negative rates or more QE, while US jobless claims data will be interesting to see if the previous weekly rise was the start of a new trend or an anomaly.