USD appears to be in some sort of consolidation mode over recent days, after the steady fall we’ve seen since mid-December; US 10-year yields have consolidated around the 2.70% mark; NZD trading at 0.7335 USD after dipping to 0.7280 last evening

By Jason Wong

Weaker global equity markets are the order of the day, while currency and bond market movements are well contained.

US equities are down close to 1% following similar chunky falls across Asia and Europe.  We have been well overdue for some sort of pullback in equity markets and perhaps the recent rise in bond rates has finally got the market’s attention.  US 10-year yields have consolidated around the 2.70% mark, trading in a 2.68-2.73% range for the session.

This isn’t a classic risk-off move, with losses confined to equity markets and safe-haven assets haven’t outperformed.  A more than 1% fall in oil prices has hit energy stocks, while Amazon, Berkshire and JPMorgan announced a plan to collaborate on a way to offer cheaper health-care services to their US employees, seeing health care stocks tumble. It’s an interesting development from a central banking point of view as well. While the joint effort will take some time to get traction, if they succeed then this will act as a dampening force on inflation, with health care costs making up over a fifth of the PCE deflator, the Fed’s target inflation measure.

There has also been a bit of economic data to digest.  US consumer confidence was higher than expected, running near a 17-year high.  Annual euro-area GDP growth of 2.5% y/y was the strongest since the GFC. Economic confidence, a mixture of consumer and business confidence, was slightly weaker than expected, but coming off a 17-year high.  German CPI inflation undershot expectations, setting the scene for a possible undershoot of euro-area CPI figures tonight.  It highlights the dilemma facing the ECB, with strong economic growth but still-soft inflation, despite the billions of euros spent on asset purchases trying to suppress interest rates.  Ironically, the strikes notified by Germany’s most powerful union after weekend negotiations failed to get the desired 6% increase in wages might be seen as a good thing to generate higher inflation pressure.  Bring it on.

None of this appears to have had much influence on the currency market.  The USD appears to be in some sort of consolidation mode over recent days, after the steady fall we’ve seen since mid-December.  US Treasury Secretary Mnuchin is doing his best to wind-back his comments last week which saw the USD fall at the time after he didn’t advocate the “strong dollar” policy that usual folk in his position support.  At a Senate banking hearing he said that his comments on the dollar in Davos were blown out of proportion by media and were in no way intended to talk down dollar, adding that “…I strongly support we have a free currency market that we don’t intervene in”.

Since the previous NY close (11am NZ time) and the NZ close, currency movements against the USD have been within plus or minus 0.3%, with the exception being a stronger GBP, up in the order of 0.5% to 1.4140 for no obvious reason.  BoE Governor Carney is testifying to Parliament, but his comments haven’t moved the market, with the stronger GBP well in train before he started.

The NZD dipped as low as 0.7280 last evening but has regained its poise, trading at 0.7335, near the NZ close.  NZD/AUD has recovered a little to 0.9075.

The event calendar for the next 24 hours is heavy.  During local hours, Australian Q4 CPI data are released.  With a 25bps rate hike by the RBA fully priced this year, the market will be sensitive to any downside surprise, as we saw with last week’s NZ CPI figure. China PMI data and Trump’s State of the Nation speech soon follow.  Aides have said Trump is expected to set aside his more combative tone for one of compromise and bipartisanship.

Tonight the key data releases will be euro-area CPI, US ADP employment and the employment cost index.  The FOMC Statement tomorrow morning should pass without much fanfare, but we’ll have another daily to squeeze out before its 8am release.

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