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.
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.