Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
FX Update: RBNZ's big rate chop. Majors quiet after the storm
John J. Hardy
Chief Macro Strategist
Summary: RBNZ surprises with a larger than expected rate cut. Elsewhere, the major currencies trade nervously after the recent volatility storm and bond yields continue to plunge.
Trading interest
- EURCAD short idea stopped out quickly – traders worry BoC could join easing parade after RBNZ?
- Long AUDNZD on dips now with stops below 1.0400 for 1.0625 and eventually 1.0700
Yesterday’s reasonably exuberant market bounce after Monday’s bloodletting across equity markets has faded slightly overnight, even as the CNY fixing was below the middle of yesterday’s trading range and amidst various reports that Trump still wants a deal, his recent tariff threats and stern rhetoric notwithstanding. Yesterday we discussed the risk that the reaction to Trump’s new tariff threat and China’s taking the CNY beyond 7.00 to the USD could quickly fade if the latter move bogs down with no further progression, and Chinese sources have reassured that they want to keep the CNY stable. One view circulated is that China is playing the role of Trump’s wing-man in pressuring the US Federal Reserve to continue chopping rates as this will in turn reduce pressure on USD funding into China. Still, there is plenty to fret with concerns of a global slowdown also vying for negative attention.
Meanwhile, the ongoing vortex in bond yields – spike in bond prices – is the most remarkable market development and the risk off has begun spreading a bit more into corporate credit and emerging market credit, if still in lagging fashion in recent days. General risk conditions are important to track for EM traders in particular after the strong run-up in many EM currencies this year. Elsewhere, it is interesting that USDJPY hasn’t been able to punch through to a new low here as bonds were bid strongly yet again yesterday – even as gold punched through to new highs.
The currency war theme saw added traction as the RBNZ overnight made the strong point that it doesn’t want to get caught holding the bag, as Orr and company chopped rates 50 basis points rather than the expected 25, taking the NZ OCR rate in line with Australia’s main rate. At the ensuing press conference, Governor Orr made clear that further rate chops may be on the table. One wonders if Mr. Orr has had his eye on the range lows in AUDNZD when making this decision. See more on the RBNZ decision from our Eleanor Creagh.
Chart: AUDNZD
After sliding lower on concerns that China’s economic woes from the trade showdown hit Australia worse than New Zealand (and as the RBA’s cutting cycle has led the RBNZ’s slightly this year), AUDNZD jolted to life in the wake of the RBNZ meeting overnight, which has drawn a line in the sand on the charts here and points to the upside of the zone to 1.0700, probably as long as the RBNZ can out-dove the RBA.
The G-10 rundown
USD – the greenback hanging in there and then some against the riskier corners of the G10 – up smartly against all three of the commodity dollars overnight. Key for the broader picture is whether the USD weakening within the G3 sticks here.
EUR – the single currency broadly firm recently, but not sure where the catalyst is for something more profound to support besides the ongoing unwinding of carry trades after recent unsettling events.
JPY – disappointing for JPY bulls here that the new lows in major yields have not yet provided better traction for the yen – but signs are that Japan’s economy is beginning to falter as well, with the June Leading Index release overnight showing another new low and lowest since 2010. Alas, USDJPY focus lower until/unless the pair rebounds back above 107.50-108.00.
GBP – sterling losing ground again and EURGBP trading up in the last shreds of the range below the post-Brexit high near 0.9300 with nary a sign of a breakthrough, and the FT reported yesterday that the EU doesn’t even want to negotiate “mini-deals” the UK has proposed to soften the impact of a No Deal.
CHF – EURCHF rebounding back above 1.0900 but needs to bounce well above 1.1000 to suggest the slide can be arrested.
AUD – the Aussie getting some relief from the recent pounding as the focus switches to the kiwi overnight and relative value traders give the AUDNZD a thought or two after the RBNZ made its mark. Still, broadly speaking downside risks on exposure to China as tensions simmer – especially now that Australia’s chief export – iron ore – is in steep retreat and suffered another bid sell-off overnight.
CAD – the RBNZ move overnight seems to have inspired CAD selling in sympathy with NZD selling as the market begins to suspect that any DM central bank with a positive policy rate will lurch into an aggressive cutting regime to join the currency war theme (2-year CAD swaps plunged some 12 basis points yesterday). USDCAD trading at last local resistance levels ahead of today’s Ivey PMI near the 200-day moving average.
NZD – RBNZ has made its mark and planted its flag at the bottom of the AUDNZD range – market will be reluctant to buy NZD, expecting a symmetric sabre rattling from the RNBZ on any kiwi strength – room higher now for AUDNZD (finally).
SEK and NOK – market doesn’t like the thinly trade currencies here, the Riksbank and Norges Bank forecasts of further policy normalization notwithstanding – watching those range extremes in EURSEK (10.85) and EURNOK (10.00+) for next steps.
Upcoming Economic Calendar Highlights (all times GMT)
- 1330 – US Fed’s Evans (Voter) to Speak
- 1400 – Canada Jul. Ivey PMI
- 2010 – New Zealand RBNZ Governor Orr at Parliament Select Committee
- 2130 – Australia RBA’s Bullock to Speak
- 2301 – UK Jul. RICS House Price Balance
- 2350 – Japan Jun. Current Account Balance
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