Fed's Waller inches open the US rate cut door
The USD sell off that began yesterday during our day session continued overnight following senate Republicans’ failure to push through their healthcare reform.
How much a dollar cost? Is a song from American rapper Kendrick Lamar and apparently it is Barack Obama’s favourite song of 2015. Well, whichever way you measure it, a USD costs less today than it did yesterday. The USD sell off that began yesterday during our day session continued overnight following senate Republicans’ failure to push through their healthcare reform. In the process they have also increased concerns over Trump’s ability to implement his policy agenda. The AUD has added to its post RBA minutes gains and oil prices are stronger on reports that Saudi Arabia is considering additional export cuts.
After yesterday’s failure to push through a “repeal and replace” healthcare bill, overnight GOP leaders were also unable to convince all their senate Republicans to just repeal Obamacare. US data releases didn’t help the cause either with NAHB index of homebuilder activity and sentiment dropping to its lowest reading since November (64 vs 67 exp.)
So the dollar is softer across the board. BBDXY and DXY are down 0.5% with the latter index now trading at a new 10 month low (94.66). Looking at the G10 leader board, softer CPI figures in the UK and dovish minutes from the Riksbank prevented GBP (-0.09%) and SEK (-0.15%) from joining the softer USD party. Meanwhile the AUD is the outstanding outperformer (+1.54%) after making further gains post its RBA minute jump yesterday.
Prior to the UK CPI release (2.6% vs 2.7% exp., core 2.4% vs 2.6% exp.) GBP managed to record yet another new 10 month high of 1.3125, but reaction to the inflation numbers saw cable drop almost one big figure within minutes. The pair traded down to an overnight low of 1.3006, but over the past couple of hours it has settled around 1.3040.
After trading to an overnight high of 0.7943, the AUD now trades at 0.7916. Remarks from the Minutes of the early July RBA meeting have been the main driver for AUD gains. Underlining the weak USD feeding frenzy and selective investor attention has been the decision to focus on an RBA discussion over the neutral real interest rate (where inflation is stable and economic growth at potential). The RBA concluded the neutral real cash rate had dropped from pre-GFC levels of 2.5% to around 1% currently. With a 2.5% midpoint inflation target, this suggests a neutral nominal cash rate of 3.5%, well above the current 1.5% cash rate. This drove the AUD higher and weakness in the short end of the rates markets after the Minutes. It is likely that the path to a neutral cash rate – when it begins – would be a cautious one, given elevated levels of household debt. So, in our view we are not heading towards neutral for a while still.
The AUD is now trading at a new 26 month high and given the ongoing negative USD sentiment a move above 80c looks to be just a matter of time. In recent notes we have argued that on a TWI basis the AUD is starting to look stretched. We have a couple of RBA speeches this week and for choice we think Deputy Governor Debelle’s speech on Friday could be the most interesting one. Debelle speaks on Global Influences on Domestic Monetary Policy and he may take the opportunity to emphasise the RBA is likely to be on hold for an extended period of time. He may also want to clarify the purpose of the neutral cash rate discussion as well as its take on the recent sharp AUD appreciation.
The US political turmoil also weighed on US Treasury yields with the 10y note trading down to 2.2509% (4.3bps lower since Sydney’s close), flattening the curve in the process as the 2y bond drifted 1bps to 1.3477%. Meanwhile 10y Bunds closed at 0.547%, 2.9bps lower on the day. The narrowing on the UST-Bunds differential has been a contributing factor for the move higher in the Euro, the pair traded to an overnight high of 1.1583 and now trades at 1.1555, a new 14 month high.
We have a relatively light day in terms of data releases and events with none of them likely to be market moving. In our day session, RBA’s Heath speaks in a panel at the Australian Conference of Economists, but given the topic of discussion (“Women in Economics”), our sense is that we are unlikely to get any comments on monetary policy or the exchange rate.
Europe gets its May construction output and then the US releases housing starts and building permits for June. US politics are likely to remain the focus for markets.
On global stock markets, the S&P 500 was +0.04%. Bond markets saw US 10-years -0.18bp to 2.26%. In commodities, Brent crude oil +0.93% to $48.87, gold+0.6% to $1,242, iron ore +3.0% to $68.84, steam coal +1.5% to $85.55, met. coal +0.9% to $165.00. AUD is at 0.7919 and the range since yesterday 5pm Sydney time is 0.7786 to 0.7943.
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