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Currency Market Analysis

Aug 16, 2019 | Currency Market Analysis

Global Themes

The global game of jenga

Surge in bond markets does not augur well for stocks or risk currencies

If you’ve followed the move in bond markets this week you’d think the global economy is nearing an Armageddon moment. 30 year yields in the US tipped below 2%, yield curves are inverting, stocks are looking shaky. As we highlighted last week you can even get a 20 year fixed mortgage at 0% in Denmark. These are halcyon days for the Doomsdayers. Might be time to stock the cupboard with plenty of tinned food and your supersized bottles of water.

Last night the European Central Bank joined the Adrian Orr school of economics, with committee member Olli Rehn suggesting the ECB would be “better to overshoot than undershoot” on its stimulatory measures at their next meeting in September. Markets took the cue, pricing in a 50% chance of a further 20 basis points cut to -0.60% on  the ECB’s refinancing rate, and selling the Euro. NZD/EUR is up by 0.4% this morning.

If you subscribe to traditional economic theory then frontloading monetary stimulus makes sense, but there’s now a risk in this global contagion of lowering interest rates that we convince ourselves the end is arriving before it really is, and that can become self-fulfilling. Like a nervous first timer in a game of jenga there’s a chance we are going too low on the stack and the whole thing might just topple, when there were easier options to take out a few blocks at the top. The reality for us though is that markets are all perception, and until we get a shift in that mindset it would be fair to expect that safe havens like the Japanese Yen and Swiss Franc remain strong, and the Kiwi’s upside remains limited.

Aussie employment growth surges

Unemployment rate stable at 5.2%

We highlighted our view yesterday that some green shoots are showing in the Australian economy, and we saw that when July employment numbers showed a total of 41.1K jobs were added. The unemployment rate stayed steady at 5.2%, and we’re by no means suggesting the “Lucky Country” has turned the corner but the better print yesterday saw bond markets marginally scale back the probability for further RBA cuts at the next few meetings, and that was AUD positive.

Australia has had a three pronged effort to attack sagging house prices, weakening inflation and anaemic domestic consumption. Tax cuts, looser lending rules and a lower cash rate are all in play, and we think this triumvirate can pay some dividends as we move into year end. NZD/AUD edged a bit lower yesterday on the positive job news, and we’re expecting pressure on this cross to remain as markets adjust to the fact that further RBA and RBNZ cuts are an equally likely scenario.

US consumer sentiment eyed

Strong retail sales suggest US economy still faring OK

US consumer sentiment data is the only real release of note today, and if last night’s July retail sales boost of 0.7% is anything to go by then you’d expect a stable to positive uptick in this index.

The Philly Fed and Empire State manufacturing indices also beat expectations last night and that might just keep the US Dollar in control as we head into the weekend, as exporters eye a return towards four year lows. Enjoy the rugby all. May the best team win!

By Alex Ross, NZ Corporate FX Dealer


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