Below trend growth to continue
In what has been a quiet night of data releases and tweets from President Trump, the USD has been the quiet achiever amid simmering political and fiscal uncertainties in Europe, softer oil prices, flat US equities and lower US Treasury yields.
Last week we wrote about our concerns that the USD (DXY index) was looking vulnerable to a big downside move given the inex was probing below a key support level. Over the past few days, however, slowly but surely the USD has managed to crawl its way back up. To some extent, the USD has won the least ugly context as the focus appears to have shifted away from the US towards political and fiscal uncertainty in Europe. Although last night the 10y French-German spread were little changed, Italian, Greek and Spanish spreads to Bunds have continued to widen, not only reflecting political concerns in the EU, but also a rising anxiety on the fiscal position of southern EU countries amid their debt issuance requirement and expected reduction of ECB bond buying. This is a theme worth keeping an eye on.
So the EUR is one of the underperformers overnight, losing 0.5% against the USD while the CAD and NOK are at the bottom of the G10 leader board, down 0.64% and 0.68% respectively and dragged lower by a decline in oil prices (WTI -1.6% and Brent -1.2%). GBP has been the only G10 currency that has managed to gain some ground against the USD, thanks to a 1.3% rally triggered by hawkish comments from a BoE policy maker. Although BoE Forbes is a known hawk, her comments that the U.K. may soon need a rate increase saw the pound initially gain 40 pips on the headline, but the move then gathered momentum ahead of the 4pm fix.
The AUD has essentially given back all the gains post the RBA yesterday and is currently trading at 0.7636. Yesterday the RBA left the policy rate unchanged as expected, however the currency got some support by the seemingly more optimistic economic outlook by the Bank. While inflation is still expected to slowly return to target, the RBA sounded more upbeat on the labour market and also on the domestic growth outlook with the latter largely thanks to improvements in the global economy.
As for the currency, the Statement noted that “The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment”. In saying a rising exchange rate would complicate the adjustment, the RBA is still not acknowledging that on a trade weighted basis the exchange rate has been steadily appreciating since September 2015. In addition we would note that based on our own version of the RBA equilibrium model, the AUD Real trade weighted index (TWI) is back trading in the significantly overvalued zone. So unless the Real TWI overvaluation reverses soon, we think the RBA will be compelled to raise some concerns on the level of the currency. The RBA are evidently not there yet, but watch upcoming speeches with Governor Lowe the first cab off the ranks on Thursday.
Core global yields were well supported overnight with political and fiscal uncertainty helping 10y Bunds move lower while 10y US treasury yields found additional support from weakness in oil prices and dovish statement from Fed Kashkari (dove, voter) stressing that the Fed wasn’t meeting its inflation mandate and that accommodative policy remained appropriate while also noting that a strong USD will likely continue to put downward pressure on inflation.
We have a pretty light calendar today. In our Asian session, the BoJ Summary of Opinions from its January 30-31 Meeting will no doubt fill some of the headlines ( due for release at 10:50 am Sydney time), but given the Bank made no changes to its Yield Curve Control policy and QQE Programme, the chances are that we won’t learn anything new today. That being said, any comments around JGB buying strategy (i.e target volumes in 5-10y part of the curve or switch to fixed rate operations) would be of some interest to the market amid concerns around the decline in the easily saleable bond pool.
This morning Japan also releases its December current account balance and although another surplus is expected, Bloomberg is showing consensus expectations are for a mild decline in both the adjusted and unadjusted figures.
Moving on to Europe, Spain gets its industrial production figures for December and there are no major US data releases on the roster today.
Early on Thursday morning the RBNZ is unanimously expected to leave the OCR unchanged at 1.75%, however the market will be looking at the Monetary Policy Statement (MPS) to see what the Bank’s guidance will be on its future OCR track. Our BNZ colleagues believe the Bank will remove its easing bias and if so, the NZD is likely to get some support early tomorrow morning.
On global stock markets, the S&P 500 was +0.04%. Bond markets saw US 10-years -1.65bp to 2.39%. In commodities, Brent crude oil -1.09% to $55.11, gold+0.3% to $1,234, iron ore +3.3% to $83.29, steam coal -1.1% to $80.40, met.coal -1.2% to $167.00. AUD is at 0.7634 and the range since yesterday 5pm Sydney time is 0.7606 to 0.7681.
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