A further slowing in growth
The US dollar was helped overnight with surprisingly low jobless claims numbers in the US.
Me and you Going nowhere, I’m right beside you, ooh… Taking you as low as you go – “Low” Foo Fighter
In a thin trading environment US equities have closed the day flat to marginally lower while better than expected US jobless claims and a soft 30y auction have aided the move higher in UST yields. Higher US yields have helped the USD outperform across the board with AUD and NZD amongst the underperformers. Oil prices have led the decline in commodities with the IEA noting economic threats could weaken demand.
One of the big take aways from the past few days has been the broad decline in volatility across markets particularly in FX land where major FX volatility indices such the JP Morgan and DB FX have drifted down to levels not seen since late 2014. This has occurred in spite of the major risk events in the calendar this week (ECB, Fed, RBA Debelle and Brexit). The dovish shift in policy by major central banks has been one factor at play while signs that policy stimulus are starting to have a positive effect (particularly in China) have also play their part. Kicking the Brexit can down the road means a potential macro risk has been delayed yet again while the never ending, but still positive, US-China trade talks have also played into the low environment.
Back in the old days when Australia had yields above the US, a low volatility environment would play into a stronger AUD/USD as the market looked for carry opportunities . Today, if looking for carry in G10, the USD is king, although the AUD still offers value when compared to the low cash offering in the UK and negative cash rates in Japan as well as Europe. So not all is lost for the AUD. One could argue as well that given the AUD Emerging Market (EM) proxy treatment, then the fertile low vol environment for EM is likely to be good news for the AUD by association.
Looking at the calendar, for this environment to persist we need more positive data to support China’s growth greenshoot with loan and financing data the ones to watch over the coming days. US equities are also likely to become a major focus with the Q1 earnings reporting season starting in earnest tonight. Note JP Morgan and Wells Fargo report before the opening bell.
Looking at the overnight price action in more detail, US equities have essentially marked time ahead of the reporting season while UST yields have moved higher along the curve on the back of stronger US data and a soft 30y auction. Initial jobless claims fell to just 196k, a new post-1969 low, from 204k (revised from 202K), although Easter seasonal factors have flattered the numbers, the conclusion is still that the US labour market remains in good health. A soft 30y UST auction also played into the move higher in yields with the result showing a 0.6bps tail. US PPI had no market impact, coming only a day after the more important CPI release.
Higher UST yields have helped the USD perform across the board with the DXY index back above 97. The NZD and AUD have been the two weakest currencies over the past 24 hours, by 0.6% and 0.7% respectively. Notably the AUD has failed to sustained yesterday’s move above 0.7150 and the pair now trades at 0.7124. The RBA Financial Stability Review is out today with the market focus likely to be on whether the Bank shows any concerns over the ongoing decline in the housing market. Yesterday NAB revised down its expectations for residential dwelling prices. Following larger than expected falls over 2018 and early-2019, NAB is now predicting peak to trough falls of 20% in Sydney and 15% in Melbourne.
Yesterday RBNZ Governor Adrian Orr gave an interview to BBG, saying “It would be much easier if everything was aligned in one direction… But with the terms of trade at record highs and capacity constraints everywhere, you’re kinda going is it really the environment to be cutting? Likewise on the other side, with inflation below target and global economic growth slowing. So you’ve just got to get the weightings right.” Referring to speculation the bank could cut as soon as May (30% priced) Orr said, “I don’t know yet”, adding the bank will continue to evaluate incoming data. There was a marginal (around 10pip) fall in the NZD after the Orr interview was released, with the lack of reaction consistent with the lack of a clear policy signal from the interview. The NZD has continued to track lower overnight, amidst a broad-based strengthening in the USD, and is sitting towards its recent lows, at 0.6728.
Oil prices have led the overnight decline in commodities following comments from the International Energy Agency noting that agency could lower its Consumption forecasts because of economic threats. Iron ore has been one exception (+1.1 at $93.6) while steam coal is the other up $2.4 to $84.2.
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