By Kymberly Martin
Most currencies have traded reasonably tight ranges since the start of the week. The GBP/USD has nudged a little higher whilst the CAD/USD has been the worst performer.
In fairly uneventful trading, all major currencies now sit within about 0.6% of where they started the week.
Equity markets were fairly flat in Europe, while the S&P500 is currently down 0.4%, led by the energy sector. The WTI oil price has declined 2.4% overnight and the broader CRB global commodities index is down 0.9%. This weighed on the CAD and NOK which have been the two weakest major currencies. The USD/CAD has traded up from 1.3130 to 1.3210 currently.
The delivery of German IFO survey data overnight showed that the business climate and optimism had declined in July, but not by as much as expected. The EUR/USD sits a little higher this morning, just above 1.0990.
In the UK, the quarterly business optimism survey for July plunged to its lowest level since early-2009 (unsurprisingly given the June ‘Brexit’ vote). A bit of a decline in the GBP/USD set in after this release. However, it found support just below 1.3100 level before rebounding to 1.3140 currently.
The AUD/USD was on a steady ascent for much of yesterday afternoon, touching highs above 0.7490. However, it has declined alongside commodity prices in the early hours of this morning, to trade around 0.7470 currently.
Looking ahead, Wednesday’s Q2 CPI release will be a crucial influence on RBA rate cut expectations and the AUD, ahead of the RBA’s meeting next week. Currently the market prices a 67% chance of a 25bps cut next week and more than 40bps of cuts within the year ahead. Our NAB colleagues expect a 0.5% core CPI print relative to consensus at 0.4%. If delivered, this could provide some near-term support to the AUD.
The NZD/USD fell early yesterday afternoon to test support at the 0.6960 level. However, it soon found its feet and has consolidated above 0.6980 overnight.
Today, NZ trade balance data to June is due, although it is unlikely to be a major currency mover.
There is a smattering of US data releases scheduled tonight. However, the market will have tomorrow night’s US FOMC meeting firmly in its sights. But we would be surprised if the inherently dovish Fed were to cause the market to notably ramp up its rate hike expectations, and hence provide a significant boost to the USD. That task will likely fall to future data delivery.
Currently, Fed fund futures price less than one 25bps hike within the year ahead. Our core view is for a hike by year-end.
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2 Comments
NatWest paves way for introduction of negative interest rates
Bank warns business customers it may have to charge to accept deposits but says it has no plans to do so for personal accounts Read more
According to Bernanke: If the Fed wants to see full employment of capital and labor resources (which, of course, it does), then its task amounts to using its influence over market interest rates to push those rates toward levels consistent with the equilibrium rate, or—more realistically—its best estimate of the equilibrium rate, which is not directly observable. Read more
Others have a differing view:
Though central banks purport to follow something like Knut Wicksell’s natural rate theory, in reality they have changed it around such that everything is viewed via the “demand” side; and thus nothing actually makes sense including the behavior of market interest rates.
This is what Milton Friedman called the interest rate fallacy, and it indeed refuses to die. We can tell what monetary conditions are in the real economy, as opposed to financial liquidity, though the two can be linked, by the general level of interest rates. When money is plentiful, interest rates will be high not low; and when money is restricted, interest rates will be low not high. The reason is as Wicksell described more than a century ago:
[The natural rate] is never high or low in itself, but only in relation to the profit which people can make with the money in their hands, and this, of course, varies. In good times, when trade is brisk, the rate of profit is high, and, what is of great consequence, is generally expected to remain high; in periods of depression it is low, and expected to remain low.
When nominal profits are expected to be robust, holders of money must be compensated for lending it out by higher interest rates. Thus, the same holds for inflationary circumstances, where nominal profits follow the rate of consumer prices. During the Great Inflation, interest rates weren’t low at all, they were through the roof well into double digits and higher by 1980. At the opposite end in the Great Depression, interest rates were low and stayed there because, as Wicksell wrote, the rate of profit was low and was expected to be low well into the future. High quality borrowers were given as much money as they could want while the rest of the economy was deprived of funds; liquidity and safety being the only preferences in what sounds entirely familiar. Read more
Alas, the RBNZ's last publicly released calculation of the Wicksellian neutral rate turned out to be ~4.3%. Read more
Oh for goodness sake , everyone must get over this Brexit thing now . The UK has achieved through this referendum what the EU and US could not achieve through money printing /QE
The UK Pound is now so competitive ( cheap) that its going to stimulate the economy substantially over the next few years
Secondly , the Swiss and Norway were never part of the Eurozone and the last time I checked they were doing just fine
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