The risk appetite resurgence is the overarching theme here, with the latest headlines boosting hopes that a US-China trade deal is imminent and even if not, US President Trump has promised to extend the March 1 deadline if a deal is close. Additionally, Congress and Trump may even be close to a deal for border funding that would avoid a fresh government shutdown, which becomes too politically toxic for both sides if allowed to extend.
At this point, the market’s expectation for this trade deal – if that is what we are seeing – have stretched beyond what the negotiations can deliver. (We suspect a bear squeeze, benchmark chasing and CTA flows in a relatively thin market are very significant factors for the risk appetite resurgence, as the macro news is not improving.) By the time we get to an eventual deal announcement, it may soon prove a sell-the-fact setup. For now, the remarkable thing from our point of view is how well the USD has held in there over the later stages of this rally and keeps our view of the greenback positive for now until proven otherwise, particularly against the euro.
The Reserve Bank of New Zealand surprised the market’s heavy lean for a dovish statement with a far less dovish shift than expected, as the statement retained a tightening bias, even if the expectation for that next rate rise was pushed out to after 2020.
The RBNZ admitted it might have to cut rates, but retaining the tightening bias was enough to disappoint the NZD bears, who quickly flushed their shorts as short NZ rates backed up higher. We suspect this meeting is a mere delay to the eventual broad downside risk for the NZD. The first order of business will be watching whether AUDNZD can remain below 1.0500 for a sense of its relative strength.
The Riksbank is out with its latest decision and policy statement just as I am writing this report. It slightly marked down 2019 growth expectations to 1.3% from 1.9% and interestingly, has dropped its mandate for FX intervention (hardly necessary when the market has been aggressively devaluing its currency already).
On the policy outlook, the RIksbank maintains the forecast for gradual policy tightening that looks like rank fantasy if the eurozone is tilting into recession later this year, where Sweden can only follow, with its economic downside compounded by a massive housing bubble. Hard to gauge what to do here – the decision and stance is hawkish relative to a very weak currency, but we don’t like the setup for the Swedish economy. Around 10.34 on EURSEK the stress-test level for a bigger turnaround in the SEK’s fortunes. Governor Ingves press conference up later at 10:00 GMT.
