In currencies, the USD was weaker across the board, with both the DXY and broader Bloomberg DXY 0.5% lower, in part due to the Powell speech. The USD indices remain within the ranges that have been in place since May. Earlier in the session, the PBOC announced that it had re-introduced the countercyclical factor for calculating the daily CNY fix, a tool the central bank uses for dampening currency volatility, which sparked a sharp 1% appreciation in the CNY and corresponding weakness in the USD. Analysts interpreted the PBOC’s move as another sign that the central bank was uncomfortable with further currency weakness and would take steps to defend the psychologically important 7.0 level on USD/CNY.
The PBOC’s move came after the low-level US-China trade talks concluded without any signs of meaningful progress, and it seems unlikely to stop President Trump imposing tariffs on a further $200b of Chinese imports after public consultation ends on September 5th. On NAFTA, US and Mexican bilateral negotiations were extended into the weekend, with the FT reporting that the two sides were near a breakthrough, although there has been no official announcement as yet.
The CNY strength and Powell-induced USD weakness combined to help boost the NZD, which was up 0.5% to close the week at 0.6690. Higher commodity prices (copper +2%, oil +1.5%) and a further improvement in risk appetite provided further tailwinds for the NZD and other commodity currencies. Earlier on Friday morning, RBNZ Governor Adrian Orr gave an interview with Bloomberg in which he reiterated that the RBNZ was in no rush to raise rates and said that the biggest challenge the central bank faced was raising inflation. When pressed by the interviewer what could trigger a near-term rate cut, Orr said a decline in business confidence leading to a fall in output, although he added that he thought that was low probability and things were reasonably balanced right now. On the currency, Orr described the NZD as “accommodative” and seemed encouraged that further divergence between the OCR and rates elsewhere should keep pushing down on the NZD, in turn lending support to the economy. There was a brief dip down in the NZD from 0.6640 to 0.6620 on Orr’s comments, which turned out to be the lows of the day, but the reaction didn’t last long. NZ swap rates were around 1bp lower between 5 to 10 years.
The AUD was the best performing currency on Friday, over 1% higher to 0.7325, after Treasurer Scott Morrison was elected leader of the Liberal party after several days of turmoil. Morrison will replace Malcolm Turnbull as Prime Minister. The move higher in the AUD, coming after several days underperformance, likely reflected the market’s view that Morrison is less likely to make radical policy shifts than fellow leadership contender Peter Dutton. At the margin, Morrison is also likely to be perceived as less likely to lose the next election, which must be held by mid-May next year, although Labor will likely be revealed to be comfortably ahead in the polls when voters are next surveyed. The NZD/AUD eased back from its highs of 0.9160 to 0.9120 after the leadership results came in but has recovered somewhat to 0.9130. The cross remains firmly mid-range, having fully erased the losses sustained in the wake of last month’s RBNZ MPS.
It’s a reasonably quiet week data-wise ahead. Locally, the ANZ business survey will be the highlight when it is released on Thursday. The official Chinese PMIs are released on Friday.
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