Oil prices volatile on mix of headlines regarding US-Iran conflict; net price movement modestly lower. Global rates modestly higher; strong US JOLTS labour market report. RBA hikes as expected, but Australian rates and AUD fall, with dovish commentary

Net market movements have been modest over the past 24 hours. Oil is down modestly, but trading has been volatile given both positive and negative headlines regarding the US-Iran conflict. Lower Australian rates and a lower AUD have been sustained overnight following the RBA’s well-anticipated rate hike. NZD/AUD is stronger, while NZD/USD has traded in a tight range just above 0.56. Global rates are modestly higher.

There have been plenty of news headlines regarding the Middle East conflict. Yesterday, the WSJ reported that the US conducted strikes on Iran’s Qeshm Island on Monday, at the northern entrance to the Strait of Hormuz. They are the latest in a series of more discrete “defensive” operations that have apparently been going on unannounced.

Overnight, there have been reports of Qatari-brokered mediation, with a diplomat describing it as “positive”. However, there have also been negative reports. Iran has rejected reports that it is close to a deal with the US, and a spokesman for Iran’s negotiating team said no new development has been reached. Reuters reported an Iranian official saying that Iran and the US are far from a deal and that Tehran will not accept the US’s “excessive demands”.

It all sounds like déjà vu, as we have been reporting on these sorts of exchanges for months. Surprisingly, the oil market is still reacting to each headline. From a high of USD107 per barrel, oil has traded as low as USD101 and currently sits at USD103.50, down modestly for the day.

On economic data, the US JOLTS report was positive, suggesting improving conditions in the labour market. Job openings surged 333k in September to a four-month high of 7523k. Layoffs fell to their lowest level in a year, and the quits rate rose to 2.1%, its highest level in over a year, signalling that workers have more confidence to leave their jobs to seek new positions.

US Treasury yields jumped higher on the data, but most of the move wasn’t sustained. The 10-year rate reached an overnight high of 4.97% and currently sits at 4.95%, up modestly from the NZ close. The data has had little impact on Fed rate hike expectations, with +19bps priced for the December meeting. European long-term rates are also up modestly for the day.

After trading on a much weaker note following our report yesterday, US equities have recovered some of that loss. The S&P500 is currently up 0.5% and the Nasdaq index is up 1%, with some rotation back into IT stocks. The Euro Stoxx 600 index closed down 0.6%. It is fair to say that the overall mood in equity markets remains cautious, continuing the sentiment from October.

Currency market movements have been modest. Yesterday, the PBoC said it would raise the foreign-exchange reserve requirement by 2 percentage points (from 4% to 6%) from 15 November. The move is a measure to halt or slow the rate of appreciation in the Chinese yuan and follows the recent decline in USD/CNY to a four-year low of 6.645. The yuan weakened modestly after the announcement, with USD/CNY rising to 6.67. NZD/CNY is slightly stronger at 3.745 but is still trading close to a 17-year low.

For AUD, it was a case of buy the rumour, sell the fact. As widely anticipated, the RBA raised its cash rate for the fifth time this year, by 25bps to 4.85%, its highest level in 18 years, showing off its inflation-fighting credentials, unlike some other central banks we monitor (the BoJ, Fed and RBNZ, to name a few). The press statement omitted the previous reference to a willingness to hike further if needed, and Governor Bullock noted that the impact of recent rate increases has yet to be felt. Australian yields and the AUD weakened after the announcement, and the move has been sustained. A consensus is forming that the RBA is probably done tightening for the cycle.

The AUD is trading around 0.6970 this morning, from around 0.6995 pre-RBA. The NZD has been trading in a fairly tight range a little over 0.56 and is at 0.5615 this morning. NZD/AUD strengthened following the RBA announcement, sustaining a move over 0.8050. With a massive 210bps gap between the NZ and Australian cash rates, or about 180bps for the 90-day rate, we remain cautious on the cross rate. Having been burnt on previous occasions, we aren’t ready to declare that the low has been reached this cycle.

There isn’t much to say about the other currency majors, with tight ranges against the USD and unremarkable movements on NZD crosses.

Trading activity was quiet in the domestic rates market, but yields continued to push lower in the aftermath of the RBNZ’s deliberate “easing” of monetary conditions last week. Both NZGB and swap rates were marked down 2-3bps across the curve, with yields closing at their lowest levels in about eight weeks. Since the NZ close, which came just ahead of the RBA announcement, the Australian 3-year yield has fallen about 10bps and the 10-year rate about 5bps, which will impart a downside bias to NZ rates on the open.

In the day ahead, the domestic focus will be the labour market reports. The consensus sees employment growth strong enough to outweigh any lift in labour force participation, helping nudge the unemployment rate down to 5.5%, which would be the first fall in five years. Euro area CPI data tonight is expected to show annual headline inflation rising to 4.0%, with the core rate steady at 2.5%. In the US, the ISM services survey is expected to show a relatively steady headline index.

Voting in the US mid-term elections will conclude, and results will start to flow through from late afternoon NZ time. Odds strongly favour the Democrats taking the House, where the Republicans hold a slim majority. The Senate is more contested, but odds also favour a Democratic majority.

Jason Wong is the senior Markets Strategist at BNZ Markets.