Equity markets moved higher across Asia and Europe overnight, and are slightly up in US, ahead of the resumption of US-China trade talks this week. The USD has again strengthened overnight, with the various USD indices at, or close to, their highest levels this year. The NZD is down slightly on the day against the USD, but is up on all the crosses, on short-covering ahead of the RBNZ meeting tomorrow. Similarly, NZ rates bounced modestly yesterday on profit-taking ahead of the RBNZ meeting.
With no US economic data or central bank speakers overnight, the market remains fixated on politics. US Trade Representative Lighthizer and Treasury Secretary Mnuchin will meet Chinese Vice Premier Liu in Beijing this week in the hope of making progress on trade talks before the March 1st deadline. Risk sentiment was dampened late last week after Trump said he was not planning to meet President Xi face-to-face before March 1st, which was seen as reducing the chances of a deal being reached in time. But yesterday, Axios reported that informal discussions had taken place on a possible meeting in mid-March between the two Presidents, with Trump and Xi likely to speak on the phone before the deadline. The article attributed the delay in the Trump-Xi meeting to logistics, with Trump’s planned summit with North Korean Leader Kim Jong Un late this month cluttering the US President’s diary this month. We are still reasonably optimistic that the two sides can come to agreement to avert further tariff rises on Chinese imports, with Trump reportedly keen to make a deal to support the stock market.
The Chinese market reopened yesterday after the lunar New Year holiday, with the CSI300 rising 1.8% to its highest level since early October. An article in the state-run newspaper, The Economic Information Daily, that forecast a modest 6% Chinese GDP growth rate in Q1 didn’t hurt sentiment. The positive tone set in Asian markets carried over to Europe, where equity markets reversed Friday’s declines and were up around 1%.
US equities are also modestly higher, with the S&P500 and NASDAQ up 0.1% and 0.3% respectively, despite talks between Republicans and Democrats breaking down over the weekend over funding for the border wall. If no deal can be reached by Friday, the US government will go into shutdown again. The two sides could yet attempt another stop-gap funding measure to give more time for negotiations. The impasse over the border wall doesn’t bode well for negotiations over the upcoming debt ceiling limit, which will becoming binding in early March. If the debt ceiling is not raised at that point, the US Treasury will need to take ‘extraordinary measures’ to fund itself.
The USD has strengthened for an eighth day in a row, with the USD indices up around 0.4% on the day. The euro-heavy DXY index made its highest level of the year, just above 97, while the Bloomberg DXY is within a whisker of its year-to-date highs. The USD strength was broad-based, as it rose against all of the G10 currencies. US rates were around 3bps higher across the curve, with the 10 year Treasury yield rising to 2.66%.
The recent strength in the USD has been driven as much by weakness in economies offshore than by strength in the US. On that note, UK GDP overnight was weaker than expected, mainly due to a fall in investment spending as firms delay investment amidst ongoing Brexit uncertainty. UK GDP growth, at 1.3%, is at its lowest level since 2012. The GBP weakened 0.7% to 1.285, its lowest level since mid-January. The EUR fell 0.5% to 1.1270, and is now within close distance of its lowest level since mid-2017. Ongoing weakness in European economic data has seen the market push back expectations of ECB rate normalisation and weighed on the currency.
Against this backdrop of broad-based USD strength, the NZD is down slightly on the day, but has outperformed most of the other G10 currencies. The Axios report yesterday on a possible Trump-Xi meeting helped boost the NZD to 0.6770, alongside some short-covering ahead of the RBNZ meeting that takes place tomorrow. But the rise in the USD overnight has seen the NZD move down from those highs to 0.6730 as we write.
The NZ rates market also saw some profit-taking ahead of the RBNZ meeting tomorrow, which helped NZ swap rates rise across the curve. The 2 year swap was up 3bps to 1.8225%, although it remains within vicinity of its record low levels reached on Friday. The 10 year swap rate was up a lesser 1bp, to 2.41%, as the previous night’s moves in global rates weighed. With the market pricing close to a 40% chance of an RBNZ rate cut by May, the Statement tomorrow may cause a reasonable rates market reaction either way. Our expectation is that the Statement will be more dovish than November, reflecting the increased global risks since then, but not as dovish as that priced-in by the market.
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