US equities and rates are lower this morning as we continue to see a lack of follow-through from last week’s gains. The NZD has performed okay against the backdrop of weaker AUD and CAD currencies, following weak Australian GDP data and a less hawkish Bank of Canada.
AUD and CAD are the two weakest performers since this time yesterday, down 0.7-0.8%. Australian Q4 GDP was weak with growth of 2.3% y/y, some 0.3% lower than consensus, which had already been revised lower earlier this week as partial indicators were released. The soft data fuelled expectations that the RBA would cut rates later this year. A full 25bps cut to the cash rate is now priced by October, with the chance of further cuts extending into next year.
Australian rates were lower across the curve, including a 7bps fall in the 2-year swap rate and a 6bps fall in the 10-year government rate, with a couple more economists joining the now-crowded pack that sees the RBA cutting rates within the next six months. These falls spilled across into NZ rates, with swap rates down 2-3bps across the curve. About a two-thirds chance of a rate cut is priced into the NZ curve by November.
Just a couple of hours earlier, RBA Governor Lowe had maintained his more optimistic tone, that growth would recover and policy can be held steady. On the policy outlook he said that “…there are plausible scenarios under which the next move in interest rates is up. There are also plausible scenarios under which it is down. At the moment, the probabilities appear reasonably evenly balanced.” Governor Lowe continues to downplay the impact of falling house prices, and sees a tight labour market, with the prospect of rising incomes supporting household spending. Labour market indicators over coming months will be at the top of the list of variables to monitor to see if the RBA will capitulate.
Much of the fall in the AUD came in the hours after the GDP release. Overnight the currency has found some support around 0.7020. The weaker AUD spilled over into the NZD, which almost got down to 0.6750 near the local close, but it has since settled around 0.6775. NZD/AUD has pushed on up to 0.9640, still in the tough resistance zone of 0.96-0.9650, but with odds favouring a break to make further gains ahead of Australia’s May Federal election.
The Bank of Canada left its policy rate unchanged and softened its tightening bias. The previous language of seeing the need for rates to rise over time was replaced by a comment that borrowing costs will remain below neutral for now and there is increased uncertainty about the timing of future rate increases. A softening in the tightening bias was expected by the market but CAD still weakened after the announcement, with USD/CAD up 0.7% to 1.3450 and NZD/CAD back up to the top of its recent trading range around 0.91.
The NZD is weaker on the other crosses, although the damage was done during local trading hours, with some support seen in overnight trading.
Bloomberg reported that the ECB, at its policy update tonight, is poised to cut its economic forecasts by enough to justify another round of concessionary loans to banks, according to unnamed sources – although a full announcement on new loans may not come until a later meeting. Inflation and GDP forecasts will be extensively cut for 2019, while the inflation outlook will be cut through 2021. The report aligns with market expectations but caused a spike down in EUR to as low as 1.1286, before bouncing back.
Both the FT and WSJ lead stories this morning are reports of the US trade deficit for the year to 2018 rising to a 10-year high of $621bn, and the deficit with China rising to a record $419bn, a bad look for President Trump whose goal was to cut the deficit. Ironically, Trump’s policies of stoking the US economy with tax cuts and his tariffs policy were contributing factors. With proof that his trade policy has gone awry, the data should help seal the deal of a US-China trade agreement and hopefully Trump won’t go down the route of adding auto tariffs to European cars, which he still has a couple of months to decide upon.
NY Fed President Williams, in a speech just given, reiterated the party line that the Fed can afford to be flexible and wait for the data to guide its approach. He added that the current Fed Funds rate of 2.4% “puts us right at neutral”. We note previous indications from the Fed suggested that the current rate was at the lower end of the range of neutral. If estimates of the neutral rate have fallen again, then there is less reason to expect the Fed to hike rates again this cycle. The US 10-year rate is sitting on its low for the day at 2.68%, down 4bps against a backdrop of US equities showing modest falls, struggling to show further gains after the equity market’s strong recovery.
In today’s session, Australian retail sales data are released – a miss to the downside here could see NZD/AUD break higher. The ECB meeting announcement and President Draghi’s press conference are the key events tonight.
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