As we are about to press the send button, the RBNZ has just released it economic update and although a dovish tone was expected, the NZD has dropped 25/30pips to around 0.6988 on the back of comments that a decline in the exchange rate is needed while significant OCR cuts would follow if the currency stayed above projection. Our BNZ economists note that today’s RBNZ comments should put to bed any remaining thoughts that the Bank would not cut because of housing market concerns. The commentary reiterates, implicitly, that monetary policy will be directed towards inflation outcomes and that the Bank’s inflation forecasts have been lowered.

After a lacklustre Asia pacific session, European and US equity markets have ended the day in a positive note bolstered by better than expected corporate earnings results. In the US, Morgan Stanley and Microsoft profits topped estimates while in Europe, SAP and VW also beat their forecasts. The USD was stronger against most currencies and the VIX index drifted sub 12 for the first time in almost two years. The improvement in risk sentiment helped core global yields drift higher while oil prices were little changed.

According to the ABC, yesterday the range in Sydney’s temperature was less than 1°c, not sure if that was a record, but it seems pretty impressive nonetheless. In a similar way, yesterday during the day the AUD also traded in a pretty tight range (30 pips). The overnight session broke that trend with the AUD coming under a little bit of pressure on the back of broad USD strength and soft commodity prices. The CRB index was down 0.5%, Copper was off 0.4% and iron ore recorded its six consecutive day of decline, dropping 0.5%. A week ago iron ore was flirting with a break above the $60 mark and today the bulk metal is trading at $55.75.

The steady rise in short dated US yields has been a major source in the recent USD uplift. While the expectation of further easing by many central banks (BoE, BoJ, RBNZ and RBA) is on the rise, the prospect of fed tightening is back on the agenda supported by better than expected US data releases and a solid start to the Q2 earnings reporting season. USD indices like DXY and Fed major have now broken the upper band of their recent ranges, suggesting we could be at the start of a significant USD uptrend. Two weeks ago the market was pricing a probability of just 12% for a Fed hike in December, today that number is at 48%.

Looking at the G10 currencies performance, GBP and JPY are once again at the opposite ends of the leader board. GBP is the top performer following a better than expected employment report (unemployment unexpectedly fell to 4.9%, albeit the result pre dates the referendum) and comments from BoE Forbes that the Bank needs more evidence to cut rates. Meanwhile, JPY lost ground against the USD following news that the Japanese government is considering over ¥20trn in stimulus to support the economy, previous numbers were in the region of ¥10- ¥20 trn.

Coming Up

Ebay, American Express and Intel are all due to report their quarterly earnings and outlook any time now (after the US closes). So depending on the magnitude of hit or misses, the associated headlines could potentially influence the risk tone in Australia and Asian markets this morning.

The NAB business survey for the September quarter is due for release at 11:30am AEST. The June monthly NAB survey showed business conditions rose to an equal post-GFC high while Business Confidence climbed to its long-term average. Unlike the June monthly survey, the quarterly survey was polled before the UK referendum, however given its larger sample and questionnaire; details of the report should still draw some interest. In particular we will be looking at how business sees the various constraints to growth as well as their capital expenditure expectations.

Also this morning New Zealand prints its net migration figures for June followed by credit card spending numbers (June) early this afternoon.

In Europe, June UK retail sales are the data highlight and the UK Prime Minister, Theresa May, will be visiting French president Francois Hollande in Paris.

The ECB will holds its first post Brexit meeting and like the BoE decision to stand pat, no move is expected with President Draghi likely to emphasise a ‘wait and see mode’. That being said, we think that Draghi might also take the opportunity to comment on potential solution(s) to the bad loan issue in the Italian bank system.

On the other side of the Atlantic, the US prints its weekly jobless claims and the July Philly Fed is released along with existing home sales for June

Overnight

On global stock markets, the S&P 500 was +0.43%. Bond markets saw US 10-years +2.92bp to 1.58%. In commodities, Brent crude oil +0.86% to $47.11, gold-1.2% to $1,316, iron ore -0.5% to $55.75. AUD is at 0.7471 and the range since yesterday 5pm Sydney time is 0.7463 to 0.75.

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•  Markets Today:  21 July 2016 (PDF, 1MB)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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