Category

FX and Rates

Brief FX & Rates: RBA and RBNZ in the Hot Seat, Trump’s Tirade Threatens Global Risk Appetite and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. RBA and RBNZ in the Hot Seat, Trump’s Tirade Threatens Global Risk Appetite
  2. Low Inflation May Force the RBA’s Hand in May
  3. Dollar Tests Highs as Global Risk Aversion Remains Elevated

1. 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.

2. Low Inflation May Force the RBA’s Hand in May

The downside miss on inflation in Australia probably forces the RBA’s hand to cut rates.  The RBA generally doesn’t fuss too much with appearances once it changes its mind, so a cut at its next policy meeting as soon as 7 May is likely, even though it would come only weeks before the Federal election on 18 May.

One cut is unlikely to be viewed as significant enough to make a material difference on the inflation outlook, so a second cut is likely before the dust has had time to settle on the first, so within the next Month (4 June) or two (2 July).

The risk is high that a rate cut watch in Australia dominates near term AUD price action and triggers a further significant fall in the currency.

3. Dollar Tests Highs as Global Risk Aversion Remains Elevated

The USD is testing the top of its range for over a year against the DXY major currency index, and its highs for the year-to-date against the broader Bloomberg dollar index against ten leading currencies.  The rebound in the USD is surprising in light of the stronger than expected Chinese economic data.  However, other economic reports suggest that global manufacturing and export growth remains weak; including flash April PMIs and export data in Korea and Singapore.  Strength in the dollar reflects some risk aversion related to higher oil prices on USA’s Iran policy, Brexit risks, Italian government risks, and USA trade policy risks.  US bond yields stalled, consistent with some risk aversion.  However, US equities powered to new closing highs.  

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Brief FX & Rates: Global Risks Escalate and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Global Risks Escalate
  2. Could China Dump Its Dollars In Some ‘Trade’ Retaliation? Or Will US Dollar Strength Continue?
  3. Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies
  4. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week
  5. A Tortured RBA Statement – They Make the Case to Ease Policy, but Held Steady for No Apparent Reason

1. 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.

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

Dxy

  • 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

3. 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.

4. 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.

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

By | Daily Briefs, FX and Rates

In this briefing:

  1. Could China Dump Its Dollars In Some ‘Trade’ Retaliation? Or Will US Dollar Strength Continue?
  2. Trump Presses His Advantage Against China; CNY Drags Down Asian Currencies
  3. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week
  4. A Tortured RBA Statement – They Make the Case to Ease Policy, but Held Steady for No Apparent Reason
  5. RBA and RBNZ in the Hot Seat, Trump’s Tirade Threatens Global Risk Appetite

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

Dxy

  • 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

2. 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.

3. 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.

4. 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.

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

3%20 %20copy

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.

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: Low Inflation May Force the RBA’s Hand in May and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Low Inflation May Force the RBA’s Hand in May
  2. Dollar Tests Highs as Global Risk Aversion Remains Elevated

1. Low Inflation May Force the RBA’s Hand in May

The downside miss on inflation in Australia probably forces the RBA’s hand to cut rates.  The RBA generally doesn’t fuss too much with appearances once it changes its mind, so a cut at its next policy meeting as soon as 7 May is likely, even though it would come only weeks before the Federal election on 18 May.

One cut is unlikely to be viewed as significant enough to make a material difference on the inflation outlook, so a second cut is likely before the dust has had time to settle on the first, so within the next Month (4 June) or two (2 July).

The risk is high that a rate cut watch in Australia dominates near term AUD price action and triggers a further significant fall in the currency.

2. Dollar Tests Highs as Global Risk Aversion Remains Elevated

The USD is testing the top of its range for over a year against the DXY major currency index, and its highs for the year-to-date against the broader Bloomberg dollar index against ten leading currencies.  The rebound in the USD is surprising in light of the stronger than expected Chinese economic data.  However, other economic reports suggest that global manufacturing and export growth remains weak; including flash April PMIs and export data in Korea and Singapore.  Strength in the dollar reflects some risk aversion related to higher oil prices on USA’s Iran policy, Brexit risks, Italian government risks, and USA trade policy risks.  US bond yields stalled, consistent with some risk aversion.  However, US equities powered to new closing highs.  

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
  5. Low Inflation May Force the RBA’s Hand in May

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

1

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

3%20 %20copy

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.

5. Low Inflation May Force the RBA’s Hand in May

The downside miss on inflation in Australia probably forces the RBA’s hand to cut rates.  The RBA generally doesn’t fuss too much with appearances once it changes its mind, so a cut at its next policy meeting as soon as 7 May is likely, even though it would come only weeks before the Federal election on 18 May.

One cut is unlikely to be viewed as significant enough to make a material difference on the inflation outlook, so a second cut is likely before the dust has had time to settle on the first, so within the next Month (4 June) or two (2 July).

The risk is high that a rate cut watch in Australia dominates near term AUD price action and triggers a further significant fall in the currency.

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: Dollar Tests Highs as Global Risk Aversion Remains Elevated and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Dollar Tests Highs as Global Risk Aversion Remains Elevated

1. Dollar Tests Highs as Global Risk Aversion Remains Elevated

The USD is testing the top of its range for over a year against the DXY major currency index, and its highs for the year-to-date against the broader Bloomberg dollar index against ten leading currencies.  The rebound in the USD is surprising in light of the stronger than expected Chinese economic data.  However, other economic reports suggest that global manufacturing and export growth remains weak; including flash April PMIs and export data in Korea and Singapore.  Strength in the dollar reflects some risk aversion related to higher oil prices on USA’s Iran policy, Brexit risks, Italian government risks, and USA trade policy risks.  US bond yields stalled, consistent with some risk aversion.  However, US equities powered to new closing highs.  

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: Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Australian Labour and Wages Indicators Point Lower Ahead of Key Data Next Week
  2. A Tortured RBA Statement – They Make the Case to Ease Policy, but Held Steady for No Apparent Reason
  3. RBA and RBNZ in the Hot Seat, Trump’s Tirade Threatens Global Risk Appetite
  4. Low Inflation May Force the RBA’s Hand in May
  5. Dollar Tests Highs as Global Risk Aversion Remains Elevated

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

3

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.

2. 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.

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

3%20 %20copy

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.

4. Low Inflation May Force the RBA’s Hand in May

The downside miss on inflation in Australia probably forces the RBA’s hand to cut rates.  The RBA generally doesn’t fuss too much with appearances once it changes its mind, so a cut at its next policy meeting as soon as 7 May is likely, even though it would come only weeks before the Federal election on 18 May.

One cut is unlikely to be viewed as significant enough to make a material difference on the inflation outlook, so a second cut is likely before the dust has had time to settle on the first, so within the next Month (4 June) or two (2 July).

The risk is high that a rate cut watch in Australia dominates near term AUD price action and triggers a further significant fall in the currency.

5. Dollar Tests Highs as Global Risk Aversion Remains Elevated

The USD is testing the top of its range for over a year against the DXY major currency index, and its highs for the year-to-date against the broader Bloomberg dollar index against ten leading currencies.  The rebound in the USD is surprising in light of the stronger than expected Chinese economic data.  However, other economic reports suggest that global manufacturing and export growth remains weak; including flash April PMIs and export data in Korea and Singapore.  Strength in the dollar reflects some risk aversion related to higher oil prices on USA’s Iran policy, Brexit risks, Italian government risks, and USA trade policy risks.  US bond yields stalled, consistent with some risk aversion.  However, US equities powered to new closing highs.  

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’s Debelle Strikes Optimistic Tone; Remains Lazor Focused on the State of the Labour Market and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. RBA’s Debelle Strikes Optimistic Tone; Remains Lazor Focused on the State of the Labour Market

1. RBA’s Debelle Strikes Optimistic Tone; Remains Lazor Focused on the State of the Labour Market

We had warned to watch out for dovish noises from the RBA this week after it changed its monetary policy meeting statement earlier in the month to say they are monitoring developments, suggesting they may be willing to consider a rate cut in coming months if downside risks to growth materialize.

Watch out for dovish noises from the Fed and RBA; 10 April – AmpGFXcapital.com

However, the speech on the “State of the Economy” on Wednesday by Deputy Governor Guy Debelle sounded relatively optimistic that the deterioration in the outlook since mid-2018 both in Australia and globally may be temporary.  The RBA is more watchful, but not yet ready to cut rates.

Debelle highlighted risks to the Australian growth outlook including the clampdown on shadow financing in China and trade tensions, slower household consumption in Australia and a weaker housing market. 

However, he sounded more optimistic on the state of the global economy than many market commentators, noting ongoing strength in service sectors and employment and wage growth (globally and in Australia).

He tended to downplay the negative influence the housing market decline may have on the Australian economy.

He suggested that the RBA is lazor focused on the labour market. Provided employment growth continues, unemployment declines and wages growth accelerates, the RBA is unlikely to cut rates.  At this time, the RBA still sees strength in leading indicators of the labour market, even though job ads have fallen in recent months. It appears to prefer the vacancy data that rose to a new high in February from three months earlier.

Understandably, in response to Debelle’s glass half full speech, Australian rates and the AUD have firmed.

It is fair to predict that the RBA will cut rates later this year, as most market economists have done.  However, Debelle and the RBA are not yet convinced this will be necessary.  In particular, it appears to need evidence that the labour market is losing momentum, and this may take several months.

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: Watch Out for Dovish Noises from the Fed and RBA and more

By | Daily Briefs, FX and Rates

In this briefing:

  1. Watch Out for Dovish Noises from the Fed and RBA

1. Watch Out for Dovish Noises from the Fed and RBA

1

We see scope for dovish noises from the FOMC minutes and Fed speakers.  The Fed appears to be in the process of shifting towards adopting an average inflation target, which should make them more sanguine if inflation rises above the 2% target and more responsive to signs that economic growth may be slowing.  We expect no substantive changes in policy guidance from the ECB this week.  The RBA has opportunities in a speech and the financial stability review this week, and its minutes next week to flesh out what appears to have been a shift to an easing bias earlier this month.

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

By | Daily Briefs, FX and Rates

In this briefing:

  1. A Tortured RBA Statement – They Make the Case to Ease Policy, but Held Steady for No Apparent Reason
  2. RBA and RBNZ in the Hot Seat, Trump’s Tirade Threatens Global Risk Appetite
  3. Low Inflation May Force the RBA’s Hand in May
  4. Dollar Tests Highs as Global Risk Aversion Remains Elevated
  5. RBA’s Debelle Strikes Optimistic Tone; Remains Lazor Focused on the State of the Labour Market

1. 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.

2. 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.

3. Low Inflation May Force the RBA’s Hand in May

The downside miss on inflation in Australia probably forces the RBA’s hand to cut rates.  The RBA generally doesn’t fuss too much with appearances once it changes its mind, so a cut at its next policy meeting as soon as 7 May is likely, even though it would come only weeks before the Federal election on 18 May.

One cut is unlikely to be viewed as significant enough to make a material difference on the inflation outlook, so a second cut is likely before the dust has had time to settle on the first, so within the next Month (4 June) or two (2 July).

The risk is high that a rate cut watch in Australia dominates near term AUD price action and triggers a further significant fall in the currency.

4. Dollar Tests Highs as Global Risk Aversion Remains Elevated

The USD is testing the top of its range for over a year against the DXY major currency index, and its highs for the year-to-date against the broader Bloomberg dollar index against ten leading currencies.  The rebound in the USD is surprising in light of the stronger than expected Chinese economic data.  However, other economic reports suggest that global manufacturing and export growth remains weak; including flash April PMIs and export data in Korea and Singapore.  Strength in the dollar reflects some risk aversion related to higher oil prices on USA’s Iran policy, Brexit risks, Italian government risks, and USA trade policy risks.  US bond yields stalled, consistent with some risk aversion.  However, US equities powered to new closing highs.  

5. RBA’s Debelle Strikes Optimistic Tone; Remains Lazor Focused on the State of the Labour Market

We had warned to watch out for dovish noises from the RBA this week after it changed its monetary policy meeting statement earlier in the month to say they are monitoring developments, suggesting they may be willing to consider a rate cut in coming months if downside risks to growth materialize.

Watch out for dovish noises from the Fed and RBA; 10 April – AmpGFXcapital.com

However, the speech on the “State of the Economy” on Wednesday by Deputy Governor Guy Debelle sounded relatively optimistic that the deterioration in the outlook since mid-2018 both in Australia and globally may be temporary.  The RBA is more watchful, but not yet ready to cut rates.

Debelle highlighted risks to the Australian growth outlook including the clampdown on shadow financing in China and trade tensions, slower household consumption in Australia and a weaker housing market. 

However, he sounded more optimistic on the state of the global economy than many market commentators, noting ongoing strength in service sectors and employment and wage growth (globally and in Australia).

He tended to downplay the negative influence the housing market decline may have on the Australian economy.

He suggested that the RBA is lazor focused on the labour market. Provided employment growth continues, unemployment declines and wages growth accelerates, the RBA is unlikely to cut rates.  At this time, the RBA still sees strength in leading indicators of the labour market, even though job ads have fallen in recent months. It appears to prefer the vacancy data that rose to a new high in February from three months earlier.

Understandably, in response to Debelle’s glass half full speech, Australian rates and the AUD have firmed.

It is fair to predict that the RBA will cut rates later this year, as most market economists have done.  However, Debelle and the RBA are not yet convinced this will be necessary.  In particular, it appears to need evidence that the labour market is losing momentum, and this may take several months.

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