July 16, 2015

Markets Today: Guilt by association

News wise, nothing bad has happened in or to Australia since we went home last night. Yet the AUD sits almost a full cent lower than where we left it.

News wise, nothing bad has happened in or to Australia since we went home last night. Yet the AUD sits almost a full cent lower than where we left it. In truth, it is a case of guilt by association, following a pummelling meted out to other ‘commodity currencies’, notably the Canadian dollar after the Bank of Canada cut it policy rate by 0.25% down to 0.5% (only half expected in market pricing and economists’ polls) and the NZD took a fresh hit from another very poor Global Dairy Trade auction.

The latter sees average prices down a cool 10.7%, bringing with it speculation that the 2015/2016 milk payout could now be nearer $4 than $5. Our BNZ dairy experts this week lowered their forecast payout to $4.70 from $5.30, but risks around the revised forecast are likely now negative. Also not lost on the NZ rates market and with that the currency, will have been the Bank of Canada’s contention that the so called ‘output gap’; is significantly larger than anticipated. If NZ CPI prints softer than expected today (see ‘Coming Up’) then this view – or concern – will be given fresh succour.

So the NZD is off 1.8% in the past 24 hours, the CAD is -1.46% and AUD/USD has fallen by 1.01% and in doing so has made a new cycle low of 0.7354.  It has to be said that the size of the falls also owes something to a generally stronger US dollar, though weakness in other currencies is for the most part limited to no more than 0.5%. US dollar gains have been assisted by a combination of a series of moderately better than expected incoming US economic data, and Fed chair Janet Yellen’s prepared testimony to Congress in which she re-iterated the view that it is likely to be appropriate to take the first step toward normalising Fed policy sometime this year.

No clues on timing from Yellen, through San Francisco Fed President John Williams – a current FOMC voter and whose views are often regarded as quite closely aligned with Yellen’s – has just crossed the wires saying that September would be a ‘very plausible’ time to start raising interest rates.   The September Fed Funds futures contract currently ascribed only about a 35% probability to a September (quarter point) move so these latter comments should resonate in our time zone, more so that Yellen’s testimony and subsequent Q&A and which saw the initial jump in US yield more than fully retraced.

As for the US data, we’ve had the Empire (New York state) manufacturing survey at 3.86 up from -1.98 (3.0 expected), core PPI +0.3% (0.1% expected and previous) and industrial production up by 0.3% (more than reversing the 0.2% May job and just better than the 0.2% expected).

Also to note is a slightly softer than expected outcome for UK wages growth within the latest employment data (up to 2.8% on a 3-month year-on-year’s basis from 2.7% (excluding bonuses) and beneath the rise to 3.0% expected.  The unemployment rate also rose slightly, to 5.6% from 5.5%.  Despite this, Sterling is the only G10 currency to have bucked the stronger US dollar trend overnight and by definition is therefore showing a sharp extension of the recent gains against the AUD (now 6% up on a month ago), NZD and CAD.

Coming Up

As the dust settles on last night’s events, first up this morning NZ Q2 CPI will be the focus for antipodean markets. We’re also awaiting confirmation (or otherwise – unlikely) that the Greek parliament has voted to approve the deal struck between Tsipras and Greece’s creditors on Monday, that Tsipras has said was done with a ‘knife to his throat’. There will be a lot of defectors among Tsipras’ own Syriza party.

On CPI and following Monday’s softer than expected June food price print, our BNZ colleagues expect a quarterly rise of 0.6%, lifting annual inflation to 0.4%, from 0.1% in Q1. This is just above the market consensus (0.5% Q/Q).  The RBNZ, in its June MPS, anticipated quarterly CPI inflation of 0.4% and an annual 0.3%. Still, the market looks inclined to react to negative, rather than positive, data. Even the headline CPI result we expect for Q2, while signalling a turning point, will hardly look strong. Conversely, anything that underwhelms expectations will likely encourage the market to lower its OCR sights even further.  Bear in mind that the Q2 CPI is too soon to be reflecting the recent correction in the currency. That’s something for the subsequent quarters.

Nothing major for Australia (just good imports, RBA FX transactions) while offshore this evening we have Eurozone CPI and then the press conference from ECB President Draghi to look forward to following what will inevitably be an ‘unchanged’ policy decision.  The reported row between him and German FinMin Schaeuble last weekend seems bound to come up if the journalists present are worth their salt.

In the US, it’s  the Philly Fed survey, weekly jobless claims, NAHB housing index, Monthly TICS (capital flows) and Fed chair Yellen’s second bite at the Congressional testimony cherry. This time it’s in front of the Senate Banking Committee. The prepared testimony will be the same, but some of the questioning will be different.


On global stock markets, the S&P 500 was -0.10%. Bond markets saw US 10-years -3.99bp to 2.36%. On commodity markets, Brent crude oil -2.36% to $57.13, gold-0.4% to $1,149, iron ore +1.0% to $50.55. AUD is at 0.7375 and the range was 0.7354 to 0.7489.

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