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