Category

FX and Rates

Brief FX & Rates: Great Currency War: Slowing Global Economy Will Test Truce and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Great Currency War: Slowing Global Economy Will Test Truce
  2. Big Issues Holding Down AUD/NZD Have Flipped
  3. India Rates: INR Bond Market – The Participants
  4. Does China Control The World Gold Price?
  5. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

1. Great Currency War: Slowing Global Economy Will Test Truce

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Concerns about the slowing global economy will raise the importance of currency movements in 2019 H2 as a means to mitigate headwinds to growth. In particular, the Trump Administration seems keen to preside over a weaker dollar, particularly versus the euro and the yuan.

Markets are discounting policy easing by the Fed and the European Central Bank (ECB) that could push the yen higher in the event of no response by the Bank of Japan (BoJ). The sales tax increase in October raises downside economic risks in Japan that could ultimately force more policy easing by the BoJ.

The yuan briefly appreciated in the wake of news about the US and China resuming trade negotiations, but a final agreement is unlikely any time soon. Further monetary stimulus is likely to arrive via lower reserve requirements for banks, while deliberate weakening of the currency by the People’s Bank of China will only be contemplated if US-Sino trade talks collapse.

The current environment differs from the post-Plaza Accord environment due the persistence of low inflation and strong US growth relative to the rest of the world that has attracted strong capital inflows. A weaker dollar will require a degradation in the post-tax returns on US assets via significantly slower growth or degraded corporate operating performance.

Historically, the Fed has never targeted the US exchange rate as a policy objective, although it monitors the currency’s impact on inflationary expectations and financial conditions. Continued repetition of June’s strong Employment Situation report will make justifying three reductions in the federal funds rate in H2 impossible, thereby reducing the prospects for a weaker dollar.

2. Big Issues Holding Down AUD/NZD Have Flipped

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AUD/NZD is still languishing around record lows.  Pessimism over the AUD increased as the Australian economy stalled in the second half of last year, the Royal Commission into the financial sector unsettled confidence, the housing market downturn accelerated, political uncertainty peaked into the national election in May, and the RBA scurried to cut rates twice at back-to-back monthly meetings in June and July.  Now the regulatory, political and economic trends are moving in favour of the AUD and against NZD.  RBNZ is toughing capital requirements on NZ banks. The Australian housing market is stabilising, NZ’s is slowing.  The Australian political cycle is as positive as it has been for a decade, and tax cuts have been delivered.  Australian trade performance is much stronger, and its fiscal position has caught up to and over-taken NZ’s.  NZ is expected to cut rates in August and is largely pacing Australian rates lower. 

3. India Rates: INR Bond Market – The Participants

  • With central banks turning accommodative in their monetary policies, Emerging Market Bonds are attracting interest again. Indian local currency government bonds are well-positioned.
  • In a series of notes, we will cover the investment behavior of major market participants in the Indian Government bond market. This article discusses the Reserve Bank of India (RBI).
  • The RBI’s participation is driven by its liquidity management framework. This is under review and fresh communication is expected by mid-July. We discuss our expectations in the context of RBI’s Open Market operations.

4. Does China Control The World Gold Price?

Smartkama

  • Gold prices have broken out higher, but unusually this cannot be explained by the US Fed
  • China is a de facto part of the notional US dollar area and the PBoC is easing once again
  • PBoC ends October-April tightening: injecting RMB 1.1 trillion into markets in May and June
  • Gold prices and PBoC liquidity are closely correlated. China is driving gold prices higher

5. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

6%20 %20copy

It might be odd to suggest that the AUD will rise just at the point when the RBA has gone to max-dovishness.  But yet we are. RBA dovishness is matched by the Fed.  The global pivot to easier policy is boosting EM and commodity currencies, and the AUD has lagged its peers, suggesting upside risk.  Australian equities are outperforming, reflecting both external factors and positive news at home.  Just as the RBA, investors, and Aussies get themselves in a funk, the news has got better, quite a bit better.  The LNC was returned surprisingly and emphatically.  They plan tax cuts and are likely to respond to increasing pressure to further boost infrastructure spending.  The housing market is stabilising, boosted by regulatory credit easing and the return of the market-friendly government.  The AUD is way underdone relative to commodity prices, the external balance is at a generational high, and the government budget is in rude health.  The focus on US-China trade relations and RBA policy has hit the AUD, but may have had maximum impact.  The Xi-Trump meeting next weekend could go either way, but if talks resume and further tariff increases put on hold, we expect some modest further rise in risk appetite and upside for the AUD.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief FX & Rates: Big Issues Holding Down AUD/NZD Have Flipped and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Big Issues Holding Down AUD/NZD Have Flipped
  2. India Rates: INR Bond Market – The Participants
  3. Does China Control The World Gold Price?
  4. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

1. Big Issues Holding Down AUD/NZD Have Flipped

1

AUD/NZD is still languishing around record lows.  Pessimism over the AUD increased as the Australian economy stalled in the second half of last year, the Royal Commission into the financial sector unsettled confidence, the housing market downturn accelerated, political uncertainty peaked into the national election in May, and the RBA scurried to cut rates twice at back-to-back monthly meetings in June and July.  Now the regulatory, political and economic trends are moving in favour of the AUD and against NZD.  RBNZ is toughing capital requirements on NZ banks. The Australian housing market is stabilising, NZ’s is slowing.  The Australian political cycle is as positive as it has been for a decade, and tax cuts have been delivered.  Australian trade performance is much stronger, and its fiscal position has caught up to and over-taken NZ’s.  NZ is expected to cut rates in August and is largely pacing Australian rates lower. 

2. India Rates: INR Bond Market – The Participants

  • With central banks turning accommodative in their monetary policies, Emerging Market Bonds are attracting interest again. Indian local currency government bonds are well-positioned.
  • In a series of notes, we will cover the investment behavior of major market participants in the Indian Government bond market. This article discusses the Reserve Bank of India (RBI).
  • The RBI’s participation is driven by its liquidity management framework. This is under review and fresh communication is expected by mid-July. We discuss our expectations in the context of RBI’s Open Market operations.

3. Does China Control The World Gold Price?

Smartkama

  • Gold prices have broken out higher, but unusually this cannot be explained by the US Fed
  • China is a de facto part of the notional US dollar area and the PBoC is easing once again
  • PBoC ends October-April tightening: injecting RMB 1.1 trillion into markets in May and June
  • Gold prices and PBoC liquidity are closely correlated. China is driving gold prices higher

4. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

6%20 %20copy

It might be odd to suggest that the AUD will rise just at the point when the RBA has gone to max-dovishness.  But yet we are. RBA dovishness is matched by the Fed.  The global pivot to easier policy is boosting EM and commodity currencies, and the AUD has lagged its peers, suggesting upside risk.  Australian equities are outperforming, reflecting both external factors and positive news at home.  Just as the RBA, investors, and Aussies get themselves in a funk, the news has got better, quite a bit better.  The LNC was returned surprisingly and emphatically.  They plan tax cuts and are likely to respond to increasing pressure to further boost infrastructure spending.  The housing market is stabilising, boosted by regulatory credit easing and the return of the market-friendly government.  The AUD is way underdone relative to commodity prices, the external balance is at a generational high, and the government budget is in rude health.  The focus on US-China trade relations and RBA policy has hit the AUD, but may have had maximum impact.  The Xi-Trump meeting next weekend could go either way, but if talks resume and further tariff increases put on hold, we expect some modest further rise in risk appetite and upside for the AUD.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief FX & Rates: India Rates: INR Bond Market – The Participants and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. India Rates: INR Bond Market – The Participants
  2. Does China Control The World Gold Price?
  3. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

1. India Rates: INR Bond Market – The Participants

  • With central banks turning accommodative in their monetary policies, Emerging Market Bonds are attracting interest again. Indian local currency government bonds are well-positioned.
  • In a series of notes, we will cover the investment behavior of major market participants in the Indian Government bond market. This article discusses the Reserve Bank of India (RBI).
  • The RBI’s participation is driven by its liquidity management framework. This is under review and fresh communication is expected by mid-July. We discuss our expectations in the context of RBI’s Open Market operations.

2. Does China Control The World Gold Price?

Smartkama

  • Gold prices have broken out higher, but unusually this cannot be explained by the US Fed
  • China is a de facto part of the notional US dollar area and the PBoC is easing once again
  • PBoC ends October-April tightening: injecting RMB 1.1 trillion into markets in May and June
  • Gold prices and PBoC liquidity are closely correlated. China is driving gold prices higher

3. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

6%20 %20copy

It might be odd to suggest that the AUD will rise just at the point when the RBA has gone to max-dovishness.  But yet we are. RBA dovishness is matched by the Fed.  The global pivot to easier policy is boosting EM and commodity currencies, and the AUD has lagged its peers, suggesting upside risk.  Australian equities are outperforming, reflecting both external factors and positive news at home.  Just as the RBA, investors, and Aussies get themselves in a funk, the news has got better, quite a bit better.  The LNC was returned surprisingly and emphatically.  They plan tax cuts and are likely to respond to increasing pressure to further boost infrastructure spending.  The housing market is stabilising, boosted by regulatory credit easing and the return of the market-friendly government.  The AUD is way underdone relative to commodity prices, the external balance is at a generational high, and the government budget is in rude health.  The focus on US-China trade relations and RBA policy has hit the AUD, but may have had maximum impact.  The Xi-Trump meeting next weekend could go either way, but if talks resume and further tariff increases put on hold, we expect some modest further rise in risk appetite and upside for the AUD.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief FX & Rates: India Rates: INR Bond Market – The Participants and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. India Rates: INR Bond Market – The Participants
  2. Does China Control The World Gold Price?
  3. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up
  4. Will Powell Come to the Party?

1. India Rates: INR Bond Market – The Participants

  • With central banks turning accommodative in their monetary policies, Emerging Market Bonds are attracting interest again. Indian local currency government bonds are well-positioned.
  • In a series of notes, we will cover the investment behavior of major market participants in the Indian Government bond market. This article discusses the Reserve Bank of India (RBI).
  • The RBI’s participation is driven by its liquidity management framework. This is under review and fresh communication is expected by mid-July. We discuss our expectations in the context of RBI’s Open Market operations.

2. Does China Control The World Gold Price?

Smartkama

  • Gold prices have broken out higher, but unusually this cannot be explained by the US Fed
  • China is a de facto part of the notional US dollar area and the PBoC is easing once again
  • PBoC ends October-April tightening: injecting RMB 1.1 trillion into markets in May and June
  • Gold prices and PBoC liquidity are closely correlated. China is driving gold prices higher

3. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

6%20 %20copy

It might be odd to suggest that the AUD will rise just at the point when the RBA has gone to max-dovishness.  But yet we are. RBA dovishness is matched by the Fed.  The global pivot to easier policy is boosting EM and commodity currencies, and the AUD has lagged its peers, suggesting upside risk.  Australian equities are outperforming, reflecting both external factors and positive news at home.  Just as the RBA, investors, and Aussies get themselves in a funk, the news has got better, quite a bit better.  The LNC was returned surprisingly and emphatically.  They plan tax cuts and are likely to respond to increasing pressure to further boost infrastructure spending.  The housing market is stabilising, boosted by regulatory credit easing and the return of the market-friendly government.  The AUD is way underdone relative to commodity prices, the external balance is at a generational high, and the government budget is in rude health.  The focus on US-China trade relations and RBA policy has hit the AUD, but may have had maximum impact.  The Xi-Trump meeting next weekend could go either way, but if talks resume and further tariff increases put on hold, we expect some modest further rise in risk appetite and upside for the AUD.

4. Will Powell Come to the Party?

With a small break in the onslaught of bad news on trade barriers and talk of anti-trust investigations, US equities rebound from their recent sharp falls.  US yields are also off the deck, but the market is sending out invitations for a rate cut party, and waiting for the Fed to turn-up.  Fed Chair gave just enough hint that he might turn up, but he is still reluctant to acknowledge that risks to growth have increased. Lower US yields and hopes of rate cuts have shifted the tone from a strong dollar to a weak dollar, and this may continue for the time being. PMI data for the US from Markit have fallen sharply already pointing to weak US growth, running now below the Eurozone.  With some mixed messages from US data, payrolls data on Friday may take on even more significance.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief FX & Rates: Does China Control The World Gold Price? and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Does China Control The World Gold Price?
  2. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up
  3. Will Powell Come to the Party?

1. Does China Control The World Gold Price?

Smartkama

  • Gold prices have broken out higher, but unusually this cannot be explained by the US Fed
  • China is a de facto part of the notional US dollar area and the PBoC is easing once again
  • PBoC ends October-April tightening: injecting RMB 1.1 trillion into markets in May and June
  • Gold prices and PBoC liquidity are closely correlated. China is driving gold prices higher

2. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

6%20 %20copy

It might be odd to suggest that the AUD will rise just at the point when the RBA has gone to max-dovishness.  But yet we are. RBA dovishness is matched by the Fed.  The global pivot to easier policy is boosting EM and commodity currencies, and the AUD has lagged its peers, suggesting upside risk.  Australian equities are outperforming, reflecting both external factors and positive news at home.  Just as the RBA, investors, and Aussies get themselves in a funk, the news has got better, quite a bit better.  The LNC was returned surprisingly and emphatically.  They plan tax cuts and are likely to respond to increasing pressure to further boost infrastructure spending.  The housing market is stabilising, boosted by regulatory credit easing and the return of the market-friendly government.  The AUD is way underdone relative to commodity prices, the external balance is at a generational high, and the government budget is in rude health.  The focus on US-China trade relations and RBA policy has hit the AUD, but may have had maximum impact.  The Xi-Trump meeting next weekend could go either way, but if talks resume and further tariff increases put on hold, we expect some modest further rise in risk appetite and upside for the AUD.

3. Will Powell Come to the Party?

With a small break in the onslaught of bad news on trade barriers and talk of anti-trust investigations, US equities rebound from their recent sharp falls.  US yields are also off the deck, but the market is sending out invitations for a rate cut party, and waiting for the Fed to turn-up.  Fed Chair gave just enough hint that he might turn up, but he is still reluctant to acknowledge that risks to growth have increased. Lower US yields and hopes of rate cuts have shifted the tone from a strong dollar to a weak dollar, and this may continue for the time being. PMI data for the US from Markit have fallen sharply already pointing to weak US growth, running now below the Eurozone.  With some mixed messages from US data, payrolls data on Friday may take on even more significance.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief FX & Rates: RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up
  2. Will Powell Come to the Party?
  3. Safe Haven Status of the USD Starting to Crumble Under the Weight of Trump’s Trade Wars
  4. India Rates: Improving System Liquidity Could Keep the Yield Curve Steep

1. RBA Has Been Trying to Hold the AUD Beach Ball Under Water; Its Time May Be Up

1%20 %20copy

It might be odd to suggest that the AUD will rise just at the point when the RBA has gone to max-dovishness.  But yet we are. RBA dovishness is matched by the Fed.  The global pivot to easier policy is boosting EM and commodity currencies, and the AUD has lagged its peers, suggesting upside risk.  Australian equities are outperforming, reflecting both external factors and positive news at home.  Just as the RBA, investors, and Aussies get themselves in a funk, the news has got better, quite a bit better.  The LNC was returned surprisingly and emphatically.  They plan tax cuts and are likely to respond to increasing pressure to further boost infrastructure spending.  The housing market is stabilising, boosted by regulatory credit easing and the return of the market-friendly government.  The AUD is way underdone relative to commodity prices, the external balance is at a generational high, and the government budget is in rude health.  The focus on US-China trade relations and RBA policy has hit the AUD, but may have had maximum impact.  The Xi-Trump meeting next weekend could go either way, but if talks resume and further tariff increases put on hold, we expect some modest further rise in risk appetite and upside for the AUD.

2. Will Powell Come to the Party?

With a small break in the onslaught of bad news on trade barriers and talk of anti-trust investigations, US equities rebound from their recent sharp falls.  US yields are also off the deck, but the market is sending out invitations for a rate cut party, and waiting for the Fed to turn-up.  Fed Chair gave just enough hint that he might turn up, but he is still reluctant to acknowledge that risks to growth have increased. Lower US yields and hopes of rate cuts have shifted the tone from a strong dollar to a weak dollar, and this may continue for the time being. PMI data for the US from Markit have fallen sharply already pointing to weak US growth, running now below the Eurozone.  With some mixed messages from US data, payrolls data on Friday may take on even more significance.

3. Safe Haven Status of the USD Starting to Crumble Under the Weight of Trump’s Trade Wars

US equities couldn’t muster an end of month consolidation.  They attempted to stabilise on Thursday but closed near their lows on Friday. The weight of the news was too much – Trump expanding tariffs threats to one of its biggest and most integrated trading partners, Mexico, and trade relations hardened between China and the US. Trump plans to convince the UK to avoid Huawei, China started its own “Entity” list to potential ban US companies, and it is preparing to halt rare earth mineral exports to the US.  Optimists are giving up on a global economic recovery, and Chinese PMI data confirm its manufacturing sector is struggling already from the trade war.   The tide may be turning against the USD as the market prices in significant Fed rate cuts, its yields fall sharply, and its equity market leads recent falls.  The USA is starting to look like one of the biggest potential losers in a trade war.  Its economic data are not revealing many problems yet, but this only suggests it has further to fall.  The market is likely to dismiss stronger US economic data and panic at the first sign of weakness (raising risks around the ISM and payrolls reports next week). 

4. India Rates: Improving System Liquidity Could Keep the Yield Curve Steep

The domestic interest rate market in India has been short of funds since September, 2018. In response the Reserve Bank of India has undertaken one of its largest and swiftest bond purchase operations. Additionally, it has injected rupee liquidity by swapping dollars with the market.

The situation is now turning a corner. Currency in circulation should start returning to the formal banking system and foreign portfolio flows should hold up. We expect the central bank to slow down its liquidity injecting operations. Long-dated Government bond yields, which have up until now, been supported by these operations, can face an upward pressure relative to the short-end of the curve. We expect the yield curve to steepen further.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief FX & Rates: Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies
  2. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week

1. Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies

2

CNY falls sharply illustrating that China bears most of the fallout from the trade war.  The US economy also suffers, mostly from the risk that China boycotts US brands, but Trump may have a significant advantage.  Bilateral US tariff policy may be an effective policy to counter China’s policy of subsidizing and regulatory support of its industry.  Trump can see a political gain from the trade war and is unlikely to easily back down.  The escalation in the dispute is likely to more permanently dampen optimism that the global economy will soon rebound from its slowdown.  Downward pressure on CNY is dragging down Asian currencies, although in the long run, production may shift to other Asian nations and support their currencies.  The AUD is dragged down both as an Asian currency and a commodity currency.  The EUR stabilizes, even though the EU economy is threatened, for the same reason JPY gains – little room for yields to fall, current account surplus, a reduction in carry trades.  Safe-haven currencies gain against a weakened USD; including bitcoin.

2. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week

4

The RBA essentially made a case to cut rates on Tuesday this week.  However, it held back, perhaps influenced by the timing of the election (18 May), to give the labour market data a chance to show that it is on a tightening trend. 

This places much importance on the labour market data for April (16 May) and wages data for Q1 (15 May) due next week in Australia. One month’s data may not be enough to clear the way to cut, especially after solid employment growth in Q1, but the RBA may not need all that much encouragement. Even modest weakness in the data may raise expectations of a cut in June (currently at 30% probability).

PMI data for Australia released in recent weeks had very weak employment and wages components and suggests there is a risk towards soft labour data next week.

The forecasts alluded to in the RBA policy statement on Tuesday implied that the RBA would need to cut rates soon.  The quarterly Statement on Monetary Policy released later today may further emphasise a bias to cut rates.

The RBNZ rate cut this week confirmed that it has become more proactive than the RBA.  It appears to be getting ahead of the curve, while the RBA risks falling behind the curve.

There is considerable scope for a hit to global high-beta assets if the Trump administration moves to raise tariffs.  There may be only a modest recovery in risk appetite if the US-China trade talks are extended. The longer the talks drag on, the more delayed a possible global economic recovery, the greater the risk that the market loses confidence in global asset markets.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief FX & Rates: Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies
  2. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week
  3. A Tortured RBA Statement – They Make the Case to Ease Policy, but Held Steady for No Apparent Reason

1. Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies

2

CNY falls sharply illustrating that China bears most of the fallout from the trade war.  The US economy also suffers, mostly from the risk that China boycotts US brands, but Trump may have a significant advantage.  Bilateral US tariff policy may be an effective policy to counter China’s policy of subsidizing and regulatory support of its industry.  Trump can see a political gain from the trade war and is unlikely to easily back down.  The escalation in the dispute is likely to more permanently dampen optimism that the global economy will soon rebound from its slowdown.  Downward pressure on CNY is dragging down Asian currencies, although in the long run, production may shift to other Asian nations and support their currencies.  The AUD is dragged down both as an Asian currency and a commodity currency.  The EUR stabilizes, even though the EU economy is threatened, for the same reason JPY gains – little room for yields to fall, current account surplus, a reduction in carry trades.  Safe-haven currencies gain against a weakened USD; including bitcoin.

2. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week

4

The RBA essentially made a case to cut rates on Tuesday this week.  However, it held back, perhaps influenced by the timing of the election (18 May), to give the labour market data a chance to show that it is on a tightening trend. 

This places much importance on the labour market data for April (16 May) and wages data for Q1 (15 May) due next week in Australia. One month’s data may not be enough to clear the way to cut, especially after solid employment growth in Q1, but the RBA may not need all that much encouragement. Even modest weakness in the data may raise expectations of a cut in June (currently at 30% probability).

PMI data for Australia released in recent weeks had very weak employment and wages components and suggests there is a risk towards soft labour data next week.

The forecasts alluded to in the RBA policy statement on Tuesday implied that the RBA would need to cut rates soon.  The quarterly Statement on Monetary Policy released later today may further emphasise a bias to cut rates.

The RBNZ rate cut this week confirmed that it has become more proactive than the RBA.  It appears to be getting ahead of the curve, while the RBA risks falling behind the curve.

There is considerable scope for a hit to global high-beta assets if the Trump administration moves to raise tariffs.  There may be only a modest recovery in risk appetite if the US-China trade talks are extended. The longer the talks drag on, the more delayed a possible global economic recovery, the greater the risk that the market loses confidence in global asset markets.

3. A Tortured RBA Statement – They Make the Case to Ease Policy, but Held Steady for No Apparent Reason

This is one of the more tortured RBA policy statements for some time.   They have basically made a case to cut rates, suggested that their forecasts imply that they need to, but then have held off, hoping they are wrong and unemployment falls faster than they currently expect.

For what purpose are they holding out? With inflation languishing far below target and market-based inflation expectations down sharply more than other major economies in the last six months, there is not a sensible explanation.  It appears that they have befallen to political pressure to hold off until after the election; if so, there goes the RBA’s credibility.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief FX & Rates: Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies
  2. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week
  3. A Tortured RBA Statement – They Make the Case to Ease Policy, but Held Steady for No Apparent Reason
  4. RBA and RBNZ in the Hot Seat, Trump’s Tirade Threatens Global Risk Appetite

1. Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies

2

CNY falls sharply illustrating that China bears most of the fallout from the trade war.  The US economy also suffers, mostly from the risk that China boycotts US brands, but Trump may have a significant advantage.  Bilateral US tariff policy may be an effective policy to counter China’s policy of subsidizing and regulatory support of its industry.  Trump can see a political gain from the trade war and is unlikely to easily back down.  The escalation in the dispute is likely to more permanently dampen optimism that the global economy will soon rebound from its slowdown.  Downward pressure on CNY is dragging down Asian currencies, although in the long run, production may shift to other Asian nations and support their currencies.  The AUD is dragged down both as an Asian currency and a commodity currency.  The EUR stabilizes, even though the EU economy is threatened, for the same reason JPY gains – little room for yields to fall, current account surplus, a reduction in carry trades.  Safe-haven currencies gain against a weakened USD; including bitcoin.

2. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week

4

The RBA essentially made a case to cut rates on Tuesday this week.  However, it held back, perhaps influenced by the timing of the election (18 May), to give the labour market data a chance to show that it is on a tightening trend. 

This places much importance on the labour market data for April (16 May) and wages data for Q1 (15 May) due next week in Australia. One month’s data may not be enough to clear the way to cut, especially after solid employment growth in Q1, but the RBA may not need all that much encouragement. Even modest weakness in the data may raise expectations of a cut in June (currently at 30% probability).

PMI data for Australia released in recent weeks had very weak employment and wages components and suggests there is a risk towards soft labour data next week.

The forecasts alluded to in the RBA policy statement on Tuesday implied that the RBA would need to cut rates soon.  The quarterly Statement on Monetary Policy released later today may further emphasise a bias to cut rates.

The RBNZ rate cut this week confirmed that it has become more proactive than the RBA.  It appears to be getting ahead of the curve, while the RBA risks falling behind the curve.

There is considerable scope for a hit to global high-beta assets if the Trump administration moves to raise tariffs.  There may be only a modest recovery in risk appetite if the US-China trade talks are extended. The longer the talks drag on, the more delayed a possible global economic recovery, the greater the risk that the market loses confidence in global asset markets.

3. A Tortured RBA Statement – They Make the Case to Ease Policy, but Held Steady for No Apparent Reason

This is one of the more tortured RBA policy statements for some time.   They have basically made a case to cut rates, suggested that their forecasts imply that they need to, but then have held off, hoping they are wrong and unemployment falls faster than they currently expect.

For what purpose are they holding out? With inflation languishing far below target and market-based inflation expectations down sharply more than other major economies in the last six months, there is not a sensible explanation.  It appears that they have befallen to political pressure to hold off until after the election; if so, there goes the RBA’s credibility.

4. RBA and RBNZ in the Hot Seat, Trump’s Tirade Threatens Global Risk Appetite

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US and global asset markets appear to have built in a completed US-China trade deal relatively soon.  Equities have rebounded this year, despite sluggish global trade and industrial activity since last year. If a trade deal proves elusive, or indeed if the US raises tariffs, it can significantly undermine global asset markets.

Trump’s tweets may be tactical, but his administration has demonstrated a willingness to use tariffs to reset trade relations and for broader domestic and geopolitical objectives.  Unless there is a clear backlash on the US economy and US equities, we should expect the Trump administration to keep pushing the envelope on trade relations.

The market is leaning slightly against an RBA hike later today.  We think the RBA should cut to send a clear message that its inflation target still matters and to address a sharp fall in inflation expectations in the last six month. As such we do expect them to cut.  In any case, they will probably express an easing bias.  We don’t see as much urgency for the RBNZ to cut on Wednesday, but if the RBA go, the RBNZ is likely to follow.  Either way, the pressure for lower rates, the relative strength of the US economy, and weaker global growth trends suggests downside pressure remains on both AUD and NZD.

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Brief FX & Rates: Will Powell Come to the Party? and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Will Powell Come to the Party?
  2. Safe Haven Status of the USD Starting to Crumble Under the Weight of Trump’s Trade Wars
  3. India Rates: Improving System Liquidity Could Keep the Yield Curve Steep
  4. Global Risks Escalate
  5. Could China Dump Its Dollars In Some ‘Trade’ Retaliation? Or Will US Dollar Strength Continue?

1. Will Powell Come to the Party?

With a small break in the onslaught of bad news on trade barriers and talk of anti-trust investigations, US equities rebound from their recent sharp falls.  US yields are also off the deck, but the market is sending out invitations for a rate cut party, and waiting for the Fed to turn-up.  Fed Chair gave just enough hint that he might turn up, but he is still reluctant to acknowledge that risks to growth have increased. Lower US yields and hopes of rate cuts have shifted the tone from a strong dollar to a weak dollar, and this may continue for the time being. PMI data for the US from Markit have fallen sharply already pointing to weak US growth, running now below the Eurozone.  With some mixed messages from US data, payrolls data on Friday may take on even more significance.

2. Safe Haven Status of the USD Starting to Crumble Under the Weight of Trump’s Trade Wars

US equities couldn’t muster an end of month consolidation.  They attempted to stabilise on Thursday but closed near their lows on Friday. The weight of the news was too much – Trump expanding tariffs threats to one of its biggest and most integrated trading partners, Mexico, and trade relations hardened between China and the US. Trump plans to convince the UK to avoid Huawei, China started its own “Entity” list to potential ban US companies, and it is preparing to halt rare earth mineral exports to the US.  Optimists are giving up on a global economic recovery, and Chinese PMI data confirm its manufacturing sector is struggling already from the trade war.   The tide may be turning against the USD as the market prices in significant Fed rate cuts, its yields fall sharply, and its equity market leads recent falls.  The USA is starting to look like one of the biggest potential losers in a trade war.  Its economic data are not revealing many problems yet, but this only suggests it has further to fall.  The market is likely to dismiss stronger US economic data and panic at the first sign of weakness (raising risks around the ISM and payrolls reports next week). 

3. India Rates: Improving System Liquidity Could Keep the Yield Curve Steep

The domestic interest rate market in India has been short of funds since September, 2018. In response the Reserve Bank of India has undertaken one of its largest and swiftest bond purchase operations. Additionally, it has injected rupee liquidity by swapping dollars with the market.

The situation is now turning a corner. Currency in circulation should start returning to the formal banking system and foreign portfolio flows should hold up. We expect the central bank to slow down its liquidity injecting operations. Long-dated Government bond yields, which have up until now, been supported by these operations, can face an upward pressure relative to the short-end of the curve. We expect the yield curve to steepen further.

4. Global Risks Escalate

The trade dispute has escalated in the last two weeks and looks set to be a war of attrition.  This is not good for the Chinese economy, or the US economy.  It is not good for global growth and will detract from the performance of more trade-dependent economies.

Threats to global investor confidence include tensions between the US and Iran.  Combined with the trade war between the US and China, and Brexit chaos, there appears to be good reasons for the market to be trimming exposure to high beta assets (equities, high yield credit, EM markets) and increasing exposure to safe haven currencies – Gold and JPY.  Bond yields and rate expectations are behaving more rationally, with yields falling.

It is hard to say that the USD should continue to strengthen when US yields have fallen more than most other countries in recent weeks.  But at this stage, there are few other alternatives.  Gold seems to be an obvious choice, especially if China were to respond to their dispute with the US by seeking an alternative for their US Treasury holdings.

5. Could China Dump Its Dollars In Some ‘Trade’ Retaliation? Or Will US Dollar Strength Continue?

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  • Structural capital inflows into US assets, underpinned by global ‘safe asset’ shortage
  • Potentially up to 10% appreciation of US dollar DXY
  • EM currencies lower 
  • China unlikely to ’dump’ US assets, but may halt new money purchases

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