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Positive economic and US-China trade talk news sees risk appetite improve, driving equities and global rates higher; NZD and AUD have pushed on higher against a backdrop of a weaker USD

Currencies
Positive economic and US-China trade talk news sees risk appetite improve, driving equities and global rates higher; NZD and AUD have pushed on higher against a backdrop of a weaker USD

By Jason Wong

Positive economic and US-China trade talk news sees risk appetite improve, driving equities and global rates higher.  NZD and AUD have pushed on higher against a backdrop of a weaker USD.

Early yesterday afternoon NZ time, the FT reported that US and China have resolved most of the issues standing in the way of a deal to end their long-running trade dispute but are still haggling over how to implement and enforce the agreement – the outstanding issues being the fate of existing US tariffs on Chinese goods, which Beijing wants to see removed, and the terms of an enforcement mechanism demanded by Washington to ensure that China abides by the deal.

This report triggered an immediate lift in US Treasuries and risk currencies and we’ve seen some follow-through in overnight trading.  Trump’s economic advisor Kudlow said that negotiators are “making good headway…but we’re not there yet”.  A degree of caution remains warranted and notably the now-updated FT report includes a paragraph that negotiations could be extended all the way to the end of June and “in the most destabilising scenario, the talks could be ended abruptly, leading to a new escalation in tariffs and new stress for the markets.”

Still, economic data releases have provided some support to risk assets.  Final services PMI data across the euro area were upgraded from their initial estimates, while China’s Caixin services PMI bounced up to a 14-month high.  There’s some hope that the inflexion point in the global economic cycle has been reached, with nascent signs of a recovery, following a stretch of weaker momentum that began over a year ago.

Going against the grain, US data overnight were on the softer side, with the US non-manufacturing ISM disappointing – although the composite index remains at a high level and the employment component improved – while ADP employment was softer. More weight will be given to US payrolls data released at the end of the week, where the consensus expects a solid 180k monthly increase.

The US 10-year Treasury rate rose 3bps on the FT report to 2.50% and overnight has traded a tight 2.50-2.52% range. Germany’s 10-year rate jumped higher on the European open and the stronger PMI data helped pushed it back into positive territory, up 6bps for the day.

Higher US rates helped push NZ government rates up yesterday, with the 10-year rate up 5bps to 1.90%.  The swaps curve didn’t move as much, with the 10-year rate up 2bps to 2.21%.  There was further steepening of the curve, with the 2-year rate flat at 1.62% after another major local bank called for a 25bp OCR rate cut at the May MPS.  Half of economists surveyed by Bloomberg now expect a rate cut as soon as May and this is reflected in market OIS pricing, which yesterday closed exactly at 12.5bps, or a 50% chance. Some 29bps of easing is now priced into the curve by August.

Turning to currency markets the FT report on positive US-China trade talks triggered broadly based USD weakness, which has continued overnight. The NZD touched 0.6800 overnight and trades this morning at 0.6790, almost recovering the losses seen after the QSBO earlier this week.

NZD/AUD is weaker at 0.9535 after Australian retail sales and trade data positively surprised, seeing expectations of RBA rate cuts trimmed a little. Some 23bps of cuts is priced by August, down from 26bps the previous day.  AUD pushed up through the 0.71 handle and reached as high as 0.7130 overnight.

Stronger PMI data have supported EUR, which is back up near 1.1250.  GBP remains supported after PM May’s pivot yesterday morning, which saw her reach out to the opposition Labour party for a cross-party solution to the Brexit impasse.  Both sides have said that talks are “constructive” and the odds of a soft form of Brexit have increased.  JPY is the weakest of the majors since this time yesterday, given the higher global rates backdrop. USD/JPY trades around 111.50 and NZD/JPY is up at 75.7.

The day ahead looks uneventful and market movements should be well contained in the lead-up to the US non-farm payrolls report due Friday night.


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