FX Update: Diminishing returns from trade deal headlines?

The low volatility environment persists as yesterday saw risk sentiment continuing to improve, though without as much bearish price action for the US dollar, an interesting disconnect that we’ll have to monitor, though the signal too weak at this stage to merit much attention. The only consistent behaviour is in the Japanese yen, which remains soft with every fresh downtick in global safe haven bonds (and rise in yields). More on USDJPY in the chart below, but generally, currencies are generally in a passive mood, absorbing intermarket developments.

 In yesterday’s chart highlights, we noted that NZDUSD was threatening above a critical area, but so far showed signs of rejecting the attempt higher and interesting to see that the Antipodeans (AUD and NZD) didn’t get much out of the latest US-China trade deal noise, in which the US side is said to be considering dropping existing tariffs on more than $100 billion of Chinese imports. Specifically for NZ, note that the country reports its Q3 employment and wages data tonight.

The RBA left rates unchanged as universally expected overnight, and in its latest statement expressed the hope that lower rates will re-invigorate the property bubble (not the RBA’s words, which were: “The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth.”). The rather long statement is an expression of hope that things will return to normal, but Australia’s debt saturated economy is not likely to experience any profound recovery, and the low rates may bring stabilization to property markets, but won’t restart the bubble. The Markit Services PMI for Australia has been scraping along around 49-52 over the last many months and was out at 50.1 overnight after a bump in September. In short, while the RBA has flagged that it is unwilling to consider negative interest rate policy, it is on path for at least another cut and possibly two while joining the global call for fiscal stimulus on further economic weakness.

In her first speech late yesterday, ECB president Lagarde avoided monetary policy comments as she stood before a German audience at an award ceremony for former German finance minister Wolfgang Schaeuble. It wasn’t the venue for saying anything of note – which she thoroughly avoided doing. Schaeuble was a consistent voice against bailouts and exposing the German balance sheet in the approach to dealing with the EU debt crisis back in 2010-12, even as it was German savings getting recycled through the periphery and blowing up asset bubbles there that sparked much of the crisis in the first place.

Chart: USDJPY
USDJPY continues to offer currency traders a proxy for trading the US treasury market, as the latest weakness in US treasuries is seeing the key yield benchmarks re-approach their recent highs. An important psychological level for yields if we do continue to see weakness in treasuries is the 2.00% level (current yield near 1.80% vs. the 1.90% high from September), with USDJPY probably pulling above recent highs and challenging 110.00 if we’re set for a further melt-up in risk sentiment that weighs on safe haven bonds.