June 11, 2015

Markets Today: Wheeler dealer

To the evident delight of a section of the offshore hedge fund community, the RBNZ has just delivered on its recently instated easing bias, with a 25-point cut to the OCR to 3.25% and accompanied by a statement that further easing may be appropriate.

To the evident delight of a section of the offshore hedge fund community, the RBNZ has just delivered on its recently instated easing bias, with a 25-point cut to the OCR to 3.25% and accompanied by a statement that further easing may be appropriate. This virtually assures a follow-up 25-point cut to 3% next month (23 July) and according to our BNZ economist, quite possibly another in September. The RBNZ’s revised ’90-day-bill track’ indicates a terminal OCR somewhere between 2.75% and 3%.  Immediate market reaction to the cut is to see the AUD/NZD cross above 1.10, and NZD/USD lose 150 points to below 0.7050.

Ahead of the RBNZ, the main market development overnight has been the further back-up in bonds yields, led by Germany where the 10 year Bund pierced the 1% barrier for the first time since last September (high of 1.06%). This had the effect of propelling EUR/USD to its highest level since 18 May (1.1386).  A subsequent pull back to 0.98% saw the single currency ease back to around 1.1325.  US Treasury yields have also pushed higher, by another 5bps to 2.49% at 10 years (currently 2.48%). It’s notable that the ongoing back up in yields is not hurting equity market sentiment, where the S&P 500 has closed with a 1.2% gain and following even stronger gains in Europe.  Asset reallocation underway?

Our view of yesterday’s sharp reversal in the fortunes of USD/JPY, following remarks from BoJ Governor Kuroda that the Yen’s real (so inflation adjusted) effective exchange rate is quite low and shouldn’t fall further, is that since the key driver of the move from below ¥120 to above ¥125 was  higher Treasury yields, then this latest back up augers well for an eventual return to above ¥125.

Background noise on Greece meanwhile remains both deafening and contradictory, to the point where it is largely being ignored.  This includes news that Standard & Poors had further downgraded Greece’s sovereign rating deeper into junk territory, to CCC from CCC+ , reflecting a view Greece may default in the next 12-months. The ratings agency suggests Greece could impose capital controls to staunch ongoing bank deposit outflows and may be forced to issue a parallel currency if the withdrawals continue.  Overnight we’ve learned that the ECB has raised the amount of liquidity assistance it is providing to the Greek banking system, (the ‘ELA’) to €83bn from €80.7bn.

After the yen, the best performing G10 currency overnight has been Sterling. Not because of anything BoE Governor Mark Carney  said in his annual Mansion House address to the City of London – entirely focused on banker conduct not monetary policy and suggesting stiffer penal sentences for market rigging offences – but an upside surprise on UK industrial production.  At +0.4%, headline production exceeded the expected 0.1% gain, though ignored by markets was that the rise was driven by a sharp run-up in utilities output. Manufacturing production actual fell by 0.4%.

Coming Up

If central bank policies speak and incoming economic data are going to remain catalysts for moves in FX and rates markets – even if the subsequent volatility goes well beyond what policy makers would prefer to see – then there should be no let up in the price action today after a frenetic last 24 hours.

We will doubtless be hearing from RBNZ Governor Wheeler through the day as he hits the media circuit to explain this morning’s decisions. Data wise, it’s a session of top-drawer releases, headed by our local employment data, the slug of Chian activity readings on production, retail sales and fixed asset investment (15:30 AEST), and in the US tonight, May retail sales  (we’re also still awaiting the May China lending and money supply figures).  Markets are expecting the China numbers to print steady to higher in Y/Y terms and for US retail sales to record a strong rebound after disappointingly soft April numbers. Risk for market then if is that doesn’t happen.

Note that In front of the China data, the FT is currently leading with a report on the latest European Chamber of Commerce in China of 541 European business, 40 per cent of whom said they were planning to cut cost in China, with two thirds saying they are contemplating employee lay-offs.

As for the Labour Force report for May, our economists note that leading indicators of labour demand point to continuing and reasonably solid growth in employment in coming months.  We expect this trend to be evident in this month’s report.  NAB expects to see net employment growth to 10K in May after last month’s flat result, just sufficient to see the unemployment rate remain steady at 6.2%.  The market consensus is for somewhat higher increase in monthly employment of 15.0K and also an unchanged unemployment rate, employment forecasts ranging from -5K to +20K.


On global stock markets, the S&P 500 was +1.20%. Bond markets saw US 10-years +4.54bp to 2.48%. On commodity markets, Brent crude oil +1.11% to $65.6, gold+0.7% to $1,186, iron ore  +1.7% to $65.39. AUD is at 0.776 and the range was 0.7636 to 0.7785.Indicative range today 0.7700 – 0.7800.For more market prices, please see p.2 of the pdf).

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