December 10, 2015

Markets Today: Squeezed

As we are about to press the send bottom, the RBNZ has cut its key rate to 2.50% from 2.75%. In the statement the RBNZ has noted that it expects to reach its inflation goal at current policy settings and that the rise in the exchange rate is unhelpful and further depreciation would be appropriate.

The RBNZ has cut its key rate to 2.50% from 2.75%. In the statement the RBNZ has noted that it expects to reach its inflation goal at current policy settings and that the rise in the exchange rate is unhelpful and further depreciation would be appropriate. Some easing bias remains with the Bank commenting that it could reduce rates if “circumstances warrant”. The initial reaction saw the NZD drop to 0.6582 from pre-announcement level of 0.6641, however this move was quickly reversed. The NZD has been squeezed higher and is currently trading at 0.6693, 0.8% higher than it pre RBNZ level.

Looking at the overnight price action moves in oil prices are still the dominant driver. In the early part of the session equity stocks on both side of the Atlantic were boosted by news that chemical giants Dupont and Dow Chemical were in advanced talks to merge.

Then, a report from the US Energy Information Administration noted that crude-oil inventories fell 3.6 million barrels last week. The initial reaction to the news boosted equities higher and it also provided a leg up to commodity related currencies. However a closer look at the report revealed a larger than expected stockpile of refined products, earlier gains in oil prices were quickly reversed with the reaction triggering a selloff in equities and commodity related currencies.

For currencies the net effect from the moves in oil means that the USD is weaker against safe haven/surplus account currencies such as the JPY, CHF and EUR. Notably, the steady rise in the euro has helped it reached its strongest level in a month. In part the move higher in the euro was helped by comments from ECB Nowotny who said that analysts had formed unrealistic expectations ahead of the Bank’s meeting. “It was absurd what expectations were expressed”.

While commodity related currencies such as the AUD are little changed, they did have a volatile session. Prior to move higher in oil, the AUD traded to an overnight low of 0.7172, but as equities and oil rallied, the currency rose to an overnight high of 0.7246. Then the selloff in oil pushed the AUD back down below 71c and now is back to almost where it started at 0.7233.

Looking at core global yields, comments from ECB Nowotny appear to have contributed to the move higher in German Bunds. 10y Bund yields closed 2.9bps higher at 0.598%, 10y UK Gilts rose by up 5.4bps to 1.874% while in the US the move in oil prices has weighed on Treasury yields in spite of supply pressures. Relative to Sydney closing levels the 10y note is 1.1bps lower and currently trading at 2.207%.

Coming Up

The November Australian labour force report is due for release at 11:30 am this morning. Given the oversized outcome in October, NAB economists expect employment to print weaker at -17k as a partial payback for the extraordinary job growth in the previous month. The unemployment rate is expected to rise to 6%, however there is a risk that there could be downward revisions to last month’s figures which could push the unemployment rate higher. Market consensus is for an employment change of -10k and in line with NAB’s view, the unemployment rate is expected to rise from 5.9% to 6%.

Recent RBA speeches suggest the Bank is pretty relaxed about how the economy is travelling, RBA rate cut expectations over the year ahead are currently priced at -19bps and are consistent with the mild easing bias by the Bank. Given this relaxed environment we would suggest the AUD is probably more vulnerable to a softer than expected labour force report compared to the positive reaction from an in line or better than expected outcome. However, as the market (and NAB) is already set for a bit of a payback, unless we see a large negative print, any negative impact on the currency is unlikely to be sustained.

Looking at the offshore calendar, it is another light day of economic data releases in Europe with France’s Industrial production (Oct) the only highlight. The Swiss National Bank (SNB) has its quarterly meeting and the consensus is for the Bank to keep the deposit rate at a record-low of -0.75%. The general view here been that the SNB can afford to wait and assess the impact from the recent ECB action as well as the possible rate hike by the Fed next week.

Bank of England also meets later today and while no change is expected, close attention will be paid to the voting split. The voting is anticipated to remain at 8-1 with Ian McCafferty retaining his tightening bias. The minutes, which will be released along with the rate announcement, should also outline how the Bank’s thinking has changed since November.

Finally in the US we get weekly jobless claims, import prices and Treasury budget. None of these releases are expected to be market moving, however we would note that import prices are expected to decline by 0.8% thanks to the fall in oil prices.


On global stock markets, the S&P 500 was -0.80%. Bond markets saw US 10-years -1.05bp to 2.21%. On commodity markets, Brent crude oil +0.17% to $40.33, gold-0.1% to $1,076, iron ore +1.1% to $39.08. AUD is at 0.7239 and the range was 0.7172 to 0.7246.

For full analysis, download report:

Markets Today: 10 December 2015 (PDF, 271KB)

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