Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The RBA was a non-event, but AUD remains firm
John J. Hardy
Chief Macro Strategist
The Reserve Bank of Australia's statements overnight were numerous but most are hardly worth highlighting, save for the RBA’s noting that the China’s economy appears to be slowing and a slight upgrade to the comments on inflation as they were described as “in line with the Bank’s expectations” rather than the previous “inflation is low and is likely to remain so for some time, reflecting low growth in labour costs”. But guidance was not altered in any meaningful way and Australia’s two-year rates actually dropped a couple of basis points in line with the drop in yields elsewhere.
The AUD was firm nonetheless, with animal spirits perhaps buoyed by the bounce in Chinese equities after a number of ugly sessions there. Speaking of the overnight session in China, as of this writing, the Shanghai CNY-denominated oil future is limit up as the first leg of Iran sanctions go into effect today, even as Brent and WTI oil futures are relatively quiet.
In Turkey, the Turkish central bank moved to ease reserve rules to free up foreign currency liquidity for Turkish banks, but the move was seen as too weak to stem the flood of selling and TRY set new sharp lows late yesterday that took USDTRY above 5.40 at one point. A number of Turkish officials are apparently on the way to the US and the TRY has staged a considerable comeback to the 5.20 area as of this writing. A sign that diplomacy is turning the tide on sanctions could provide further powerful relief for the currency, but let’s see.
Chart: AUDNZD
AUDNZD is off to the races to the upside – perhaps as much due to the RBA not providing any reason to not allow the pair to go higher as any AUD-positive development in the statement release overnight. Australia versus New Zealand yield spreads stretched to a new high of around 15 basis points for the two-year swap, approximately matching the early 2016 highs for this spread (during that episode AUDNZD traded 1.1200-plus).
In short, if this Thursday’s RBNZ meeting doesn’t throw up any hurdles, AUDNZD may be set for a test of the big 1.1250-1.1300+ area, particularly if concerns centered on China are sidelined for a while.
The G-10 rundown
USD – the greenback's firmness of late was selective and without conviction – i.e.., by default. Hard to get excited about upside prospects without either risk-off or the entire US yield curve lifting, which it isn’t doing at the moment. The US Treasury Auctions are growing in size, and today sees a three-year auction of $34 billion, followed by large 10-year and 30-year auctions tomorrow and Thursday.
EUR – Italy’s yields stabilisng around the 100 basis point level for the two-year BTP and we’ll perhaps need a fresh aggravation of yields there or an impulse from US yields to get the EURUSD through 1.1500 – not sure if there is enough energy at the moment for that development.
JPY – the yen strength of late not finding fresh momentum overnight on a very positive session for equities in the Asian session, but still watching the USDJPY area around 111.00 and lower for risks of a downside pivot.
GBP – sterling weakness extending to new lows in GBPUSD as the pair came within striking distance of the big 61.8% Fibo retracement of the entire rally sequence from the non-flash crash low around 1.2000 to the 1.4300+ top just below 1.2900. But watching EURGBP for a better sense of isolated sterling weakness linked to no-deal exit worries.
CHF – EURCHF easing away from 1.1500 as a significant break might require fresh aggravation in EU peripheral spreads – read Italy.
AUD – speculative positioning and a loss of downside momentum on the chart could mean the risk of a squeeze, especially if the mood on all things China brightens for a few sessions. The 0.7450-0.7500 area looks like a pivot zone.
CAD – USDCAD 1.3000 is giving way again; next level into 1.2820 (200-day moving average) if the US dollar fades here.
NZD – the RBNZ hardly likely to introduce anything hawkish at its Thursday meeting, suggesting fundamental support for the AUDNZD upside break above 1.1000.
SEK and NOK – EURSEK could remain in the vice grip of the current range until after the September 6 election uncertainties. Meanwhile NOK is getting a bit of pep in its step from a bounce in oil prices. Friday sees CPI releases for both Sweden and Norway.
Upcoming Economic Calendar Highlights (all times GMT)
• 1400 – Canada Jul. Ivey PMI
• 1600 – US Jun. Consumer Credit
• 0305 – Australia RBA Governor Lowe Speech
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