July 21, 2017

Markets Today: Twelfth of never

The pick-up in market price action has continued overnight in FX markets. For the AUD, it’s now pretty much all about the Guy Debelle speech today.

The pick-up in market price action has continued overnight in FX markets, with the EUR to star performer, not only against what proved to further weakness in the USD, but on the crosses.  The AUD meanwhile has been cutting though all of the price action and is continuing do to do more work perched comfortably in the mid 79s, ahead of Guy Debelle’s speech at lunchtime today.  (More on that below.)  The AUD tested higher levels after yesterday’s solid local employment report (containing as-expected top line employment growth and faster full-time employment growth), but didn’t breach the 80 cent mark even with a softer USD.  Global bond markets marked time overnight with very little net change in the US and very slight rise in European yields.

The interest started yesterday with the Bank of Japan making no change to its Yield Curve Control/QE policy settings, entirely as expected.  But again – for the sixth time under BoJ Governor Kuroda’s stewardship – the Bank pushed out the time when they expect to reach their 2% inflation goal, adding a bid tone to the USD/JPY.  The Bank was expecting to meet their target around FY18 (begins 1 April 18). They revised down their CPI forecast for FY18 to 1.5% from 1.7%, now expecting that 2% inflation would be reached around FY19.  Kuroda said that risks are tilted to the downside for the economy and prices, noting that the economy was expanding moderately.

But that USD/JPY price action reversed overnight as the USD came under renewed pressure after it was revealed that the Mueller investigation into Russian involvement in the US election is to be widened to a broad range of financial transactions involving Trump’s businesses.  This pushed the USD lower by up to around 0.65%.

The seeds for a weaker USD were partly set earlier overnight, especially after ECB President Draghi press conference following the central bank’s meeting.  The formal released statement (pre-press conference) from the Governing Council re-affirmed that “if the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the programme in terms of size and/or duration”.

The EUR (and yields) drifted a little lower, but the price action heated up – the Euro soaring – once Draghi’s press conference got underway.  He said that policy measures have continued to secure the very favourable conditions necessary to help the ‘process towards’ a sustained convergence. Last month the words ‘process towards’ were not there.  Perhaps a point of semantics, but that did set the bar a bit lower.

He was firm in saying that it was unanimous in setting no precise date for when to discuss QE changes, but he did add that discussions should take place in the fall or the autumn or the fall.  Bingo!  The market was looking for any reasonable indication that the upcoming September 7 meeting would/could be the meeting when the ECB would announce a firm program to begin winding down QE.  And that was enough for the market to run on.  It’s at that meeting when there will be a full forecast review.

The ECB President also appeared not to push back too hard on the appreciation of the EUR.  Instead, in response to a question on the exchange rate, he said that overall financial conditions include bank lending surveys, rates, corporate bond spreads, equities and household wealth had been broadly supportive.  So not overly pushing back too hard on the Euro.  That preceded the announcement of the expansion of the Mueller investigation that further took the edge off the USD.

The Pound had a mixed night, underperforming especially against the Euro, weighed down by Brexit and despite somewhat better than expected UK retail sales for June.  Cable did make up some lost ground against the USD after the Mueller expansion announcement.  One other big mover on the currency front overnight was a higher NZD, seemingly playing catch-up to the AUD.

Coming up

For the AUD, it’s now pretty much all about the Guy Debelle speech today, speaking on “Global Influences on Domestic Monetary Policy”, at the CEDA/University of Adelaide function at 12.10 Adelaide time, 12.40 Eastern time.  The market will be especially attentive to any comments/perspectives that Debelle has on the dollar and the 3.5% neutral policy rate referred to in Tuesday’s Minutes.  Is the rise in the Australian dollar becoming a potential policy issue, it is already or in danger of being overvalued and any policy take outs or hints from the neutral rate discussion?  A piece in today’s AFR suggests the neutral rate discussion was not a hard policy signal, but one cannot help but think the RBA might not be totally disappointed with the rate market reaction.  There is another RBA speaker today, Michele Bullock Assistant Governor (Financial System) speaking at 2.15 AEDT.

There are NZ net migration figures this morning while tonight, Canada’s CPI and retail sales reports will get some market attention.


On global stock markets, the S&P 500 was -0.02%. Bond markets saw US 10-years -1.07bp to 2.26%. In commodities, Brent crude oil -0.93% to $49.24, gold+0.2% to $1,244, iron ore -3.1% to $68.05, steam coal +1.0% to $86.70, met. coal +0.6% to $164.00. AUD is at 0.7956 and the range since yesterday 5pm Sydney time is 0.7898 to 0.7989.

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