Increased focus on trade tensions sees a weaker NZD; AUD has held up slightly better; GBP has also underperformed despite the BoE hiking rates; UST yields have slipped back below the 3% mark

By Jason Wong

Increased focus on trade tensions sees a weaker NZD, while GBP has also underperformed despite the BoE hiking rates.  UST yields have slipped back below the 3% mark.

Trade tensions are back in the spotlight.  Yesterday morning White House officials confirmed that Trump has increased the proposed tariff rate on $200bn of additional Chinese imports from 10% to 25%.  The period of consultation has been extended and will be wrapped up in early September.  Late yesterday, China’s Ministry of Commerce said that “China is fully prepared and will have to retaliate to defend the nation’s dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries”.

This news saw CNY weakening again and USD/CNY hit a high of 6.85 before stabilising.  Some have interpreted the “fully prepared” comment from China as a signal that authorities are willing to allow the currency to depreciate further and not get in the way of market forces. In an overnight TV interview, US Commerce Secretary Ross, in referring to China, said that “We have to create a situation where it’s more painful for them to continue their bad practices than it is to reform…the President now feels that it’s potentially time to put more pressure on, in order to modify their behaviour”.

NZD has been dragged down for the ride, weakening yesterday through the local close and further overnight.  It currently sits near its low for the day around 0.6740, still within the 0.67-0.6850 trading range established through July.

The AUD has held up slightly better, but is still down 0.5% to 0.7365, and sees NZD/AUD nudge down to 0.9150, the cross remaining in a very tight range for over a month now.  Of the commodity currencies, CAD has outperformed, helped by oil prices rising by 2%.  NZD/CAD broke through May’s low and sits at its lowest level for the year around 0.8775.

In other news, the BoE voted unanimously to hike bank rate by 25bps to 0.75%, as widely expected, but Governor Carney repeated that further rate hikes will be limited and gradual, adding that policy “needs to walk, not run, to stand still” .  The Bank’s forecasts are conditional on market pricing prevailing before the Statement, which imply one rate hike per year for the next three years or so, and this leaves inflation only marginally above its target.  Brexit risks overhang the market and Carney noted that the BoE is prepared for all scenarios.  GBP initially spiked higher on the surprise that there were no dissenting votes on the committee, but the dovish overtones saw a fall thereafter.  GBP is one of the weakest of the majors, down 0.8% for the day to 1.3025 and NZD/GBP is flat around 0.5180.

A stronger USD backdrop sees EUR down through 1.16, while the yen has managed to recover over the last few hours and sees USD/JPY flat for the day around 111.70.

In the bond market, Japan conducted an unscheduled bond buying operation after the 10-year yield reached as high as 0.145%. This signals that whilst the BoJ ultimately has an upward limit of 0.20%, it is not prepared to see the market jump to that level so quickly, creating more of a two-way market in the short-term.   Italy has returned to the spotlight, with its 10-year rate up 12bps to 2.90% on nervousness ahead of Budget talks.  US 10-year Treasuries haven’t pushed on through the 3% and have retreated a little to sit down slightly to 2.98%. Yesterday, NZ bonds continued to show signs of reversing last week’s rally, with long-dated rates up 2-3bps.

Today sees the release of Australian retail sales but we’d expect typically quiet trading conditions ahead of tonight’s more important US employment report.   The market expects strong employment growth near 200k for the month and the unemployment rate slipping to 3.9%.  Wage data will be more important, and the market sees annual wage inflation steady at 2.7%, so no threat to the gradual tightening path laid down by the Fed.

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