NAB senior leaders discuss the economy and why there’s good news ahead for business.
No, the title is not a summation of Australian Treasurer Scott Morrison’s first Budget handed down last night. Rather it looks to be the most apt description of market price action – in FX at least – apropos the smart overnight session reversal in the fortunes of the Japanese Yen and the Euro.
No, the title is not a summation of Australian Treasurer Scott Morrison’s first Budget handed down last night. Rather it looks to be the most apt description of market price action – in FX at least – apropos the smart overnight session reversal in the fortunes of the Japanese Yen and the Euro. The last three days had seen EUR/USD jump from below 1.14 to above 1.16, and USD/JPY fall from above ¥111 to below ¥106. Given the torrid time macro hedge funds – and FX market participants in general – have suffered so far this year, anyone with two or three big figures on the positive side of their P&L could be completely forgiven for wanting to put something in the tin to show for their recent efforts.
So it is that without any obvious news catalysts, USD/JPY pulled up sharply and away from a test of ¥Y105.50, and EUR/USD beat a quick retreat from above 1.16, soon after Asia-Pacific traders left work for the day. EUR/USD subsequently gave back a whole big figure, to 1.15, and USD/JPY rose back to ¥106.50. There is some muttering about a ‘bullish hammer’ (candlestick chart pattern) emerging on the narrow (DXY) dollar indeed chart (please don’t ask me to explain). The DXY is up over 1% from its intra-day lows and means we did not after all record a daily close below the previous 92.60-area low from last August.
One currency that did display some independent weakness last night and which may have a hand in the broader market moves was Sterling. This was after a particular poor manufacturing PMI (49.2 down from 51.0 from and a rise to 51.2 expected). The Impending EU referendum looks to have taken a bite out of both orders and output. The NZD also took a small hit on the 1.4% decline in dairy prices in last night’s auction, against our expectation for a 4-5% lift. But looking at AUD/NZD and which is barely changed on levels seen soon after yesterday’s RBA rate cut, the AUD and NZD story is really one of being pulled lower by the JPY and EUR-led US dollar recovery. That said, weaker commodity prices (including oil) and higher volatility associated with fresh falls in US (and European) stock markets, has ensured commodity currencies sit at the foot of the G10 FX leader board (and with the AUD very firmly at the bottom).
Last night’s Budget, most of the contents of which were comprehensively leaked and so limiting any sense of anticipation or subsequent surprise, was in any event somewhat overshadowed by the earlier RBA rate cut. See our separate Budget reports. Residual market interest is in what the ratings agencies have to say in the cold light of day – they were all circumspect in their initial remarks last night.
The RBA surprised at least half the market with yesterday’s quarter point cut to the Cash Rate to 1.75%, taking it to a new record low. The absence of any explicit easing bias in the post-meeting statement is standard fare in the months in which the RBA makes a policy change, so nothing should be inferred from that in regards to their proclivity towards cutting rates further. At this stage we regard August as ‘live’ with regards to a possible follow-up cut but are not yet formally forecasting it. This Friday’s Statement on Monetary Policy will now be important, in particular for the revised inflation forecast cited behind yesterday’s actions and whether or not the new track is based on an assumption of an unchanged Cash Rate or market interest rates (bearing in mind a further quarter-point cut is fully priced in).
Budget digestion, or rather indigestion, may be the order of the morning, but from a markets perspective this won’t be important.
First up this morning is the NZ Q1 labour market data. Our BNZ colleagues are expecting to see ongoing robustness in the figures, including 0.7% quarterly employment growth in the Household Labour Force Survey and a nudge up in the unemployment rate to 5.3% from 5.5% but on immigration-fuelled working-age population growth and a slightly higher participation (68.6% from 68.4%). This would need to be seen in the context of its surprisingly big fall to 5.3% in Q4 2015 from 6.0% in Q3. Wages/salaries should shows strength in real terms.
The Australia’s calendar takes a pause in front of Thursday’s retail sales and trade data and the (more important) RBA SoMP on Friday.
Offshore tonight, the main point of interest is The US April non-manufacturing ISM (expected to show a small lift to 54.8 from 54.4, in contrast to Monday’s fall in the manufacturing version). ADP Employment is also due, and March trade figures (the latter will feed potential revision to Q1 GDP).
On global stock markets, the S&P 500 was -0.90%. Bond markets saw US 10-years -7.6bps to 1.80%. On commodity markets, Brent crude oil -1.22% to $45.27, gold-0.6% to $1,288, iron ore -4.3% to $63.41. AUD is at 0.7485 and the range since the Sydney close has been 0.7719 to 0.7484.
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