Fed's Waller inches open the US rate cut door
No doubt RBA Governor Stevens would have a wry grin with the partial pull-back in the USD overnight with the AUD/USD the best performer among the majors popping back above 0.74 overnight and where it sits this morning.
No doubt RBA Governor Stevens would have a wry grin with the partial pull-back in the USD overnight with the AUD/USD the best performer among the majors popping back above 0.74 overnight and where it sits this morning. It’s been an orderly night, bereft of economic news of note. Equities have been lower on both sides of the Atlantic, the Dow weighed down by IBM (-5.9%) and United Technologies (-7%) on revenue disappointments and revised down earnings expectations.
In FX, the USD was the loser for once, the AUD out-performing despite somewhat lower AUD-related commodity prices: iron ore prices eased somewhat (-0.55%), as did LME copper (-0.46%), with gold opening weaker, rallying back somewhat for most of the night only to relent back below $US1,100/oz, down 0.7% for the session. All of that was pretty much a side-show, as were the repeated comments in yesterday’s RBA Minutes that “further depreciation seemed both likely and necessary” (that saw the briefest of pull-backs in the AUD) to an overnight painful squeeze down in the USD. Against those now all too familiar comments on the AUD that saw the briefest of knee jerk dip in the AUD, the currency recovered, yesterday’s Minutes revealing a more positive official tone on the domestic economy, including the stabilisation in the unemployment rate over recent months.
There did not seem to be any particular trigger for the partial pull-back in the USD. It started roughly an hour after London’s open, picking up pace during the afternoon session, with the AUD/USD the big mover, up 1.45% at its peak. Bear in mind that the USD has given back 0.5% after rising 3.9% from its 18 June low. The USD lost ground against the CHF, the EUR, and the NZD was of course already bucking the trend over the prior 24 hours, rising an additional 0.75% or so overnight as traders likely took the opportunity to book some profits ahead of the RBNZ announcement tomorrow morning. USD/JPY fell 0.55%. Sterling was steady against the USD, the GBP losing ground against the AUD (-1.45% at its 2.09 lows for the GBP/AUD, likely a delayed “Lord’s” effect) and against the EUR with EUR/GBP 1.2%.
Two very meaty local events beckon with the June quarter CPI at 11.30 AEST and then at 1.05, Governor Stevens is delivering his now-annual address to the Anika foundation. He’s used this speech as an event to make major big picture speeches on macroeconomic policy, last year centred on international policy after the financial crisis and the two years previously on Australia, on “Economic Policy after the Booms” (2013) and “The Lucky Country” (in 2012, when the resources boom was it its crescendo and about to turn down sharply). There is no title available as yet. He might take the opportunity today perhaps to draw out more about the exchange rate and the economy or the now diminishing limits of what monetary policy can do to support the economy’s transition. Yesterday’s RBA Minutes recognised the improvement in recent domestic economy data, signals that reducing the chance of another monetary easing.
While the CPI is not expected to be any trigger for policy action anytime soon, it’s of course a super-important indicator. The CPI is an important market mover and has been among the top 5 most important data release for the two year yield, and the third biggest mover of the AUD/USD in 2014. However, with inflation not a major policy threshold issue at present it’s hard to see the CPI causing a big swing in either rates or currencies.
With rates markets pricing 16 bps for the RBA for a year ahead, this is on the rich side of pricing (too much easing priced); we think about 12bps is closer to fair value. The risk to market pricing accordingly would more likely come from a stronger than expected CPI that would reduce rate cut expectations. And recent NAB survey price data hint at stronger inflationary pressure. We would also assess the risk for the AUD is also from a stronger than expected outcome, which would have the greatest effect on the AUD/USD, a little more so after last night’s USD-inspired move higher. We look for 0.8% headline and 0.6% underlying CPI, the same as the market, with an upside tilt.
Not a heavy schedule of overnight releases tonight, though sterling watchers will be poring over the BoE Minutes. US house prices and Existing Home Sales data are also due.
USD gives back some territory : Eurostoxx 600 -1.0%, Dax -1.1%, CAC -0.7%, FTSE -0.3%. Dow -181 points to 17,919, -1.0%, S&P 500 -1.0%, Nasdaq -0.4%, VIX 12.22 -0.2%. Mumbai +0.6%, Nikkei 225 -0.2% and ASX 200 +0.3%; ASX SPI futures this morning -0.6%. US bond yields: 2s at 0.68% (-3), 10s at 2.33% (-5). WTI oil at $50.36 (+0.4%), Brent at $56.99 (+0.6%), Malaysian Tapis (yesterday) $58.42 (-0.6%). Gold at $1100.10/oz (-0.6%). Base metals: LME copper -0.5%, nickel -0.2%, aluminium -1.7%. Iron ore $52.1/t -0.6% Chinese steel rebar futures -1.1%. Soft commodities spot futures: wheat -1.7%, sugar -0.2%, cotton -0.7%, coffee -1.2%. Euro Dec 14 CO2 emissions at €7.97/t (-0.3%). The AUD/USD’s range overnight 0.7354-0.7450; indicative range today 0.7395-0.7460; the AUD/USD is 0.7422 now.
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