Head of FX Strategy
Summary: Trump failed to provide any fresh impression on the status of US-China trade negotiations yesterday, the RBNZ shocked the market by failing to cut rates as expected, and investors can look forward to an interesting day ahead in Washington with US Fed Chair Powell testimony and the first Trump impeachment hearings.
Trump’s speech yesterday before the New York Economic Club was short on policy details and very long on self-promotion and grievances against the Democrats. On US-China trade negotiations, Trump merely indicated that a trade deal is possible but that tariffs would be raised if no deal was struck.
The RBNZ shocked us and the consensus by failing to cut rates another 25 basis points, keeping the rate at 1.00% and spiking short NZ rates higher – to the tune of 15 basis points for the 2-year rate. The RNBZ wants to see the effects of the rate cuts in the bag before signaling more easing. Governor Orr said there was no intention to surprise the market and teased that the RBNZ will release a framework for alternative monetary policy approaches early next year. The market took this as a signal perhaps that the RBNZ would prefer to stay away from ZIRP. The market has perhaps overreacted relative to Orr’s intention, but this move has scared away the bears for the moment.
Later today, the first of Trump’s impeachment hearings is set to take place, as the top US envoy to Ukraine, William Taylor and Deputy Assistant Secretary of State George Kent are set to testify, starting at 1000 Washington time, or 1500 GMT. The partisan coverage in the news media is so rife that it is impossible to get a sense of how serious the charges are against President Trump in the general public’s eye even if the objective facts point to an impeachable offense if the charges are proven true. The issue will prove a slow-burn one as hearing progress today and Friday and in coming weeks as popular polls are tracked as well as the odds of a shift in the Senate Republican support of Trump, as only the Senate can remove a president, even an impeached one. This becomes a market moving event if Senate support for Trump wobbles.
A bit later in Washington, US Fed Chair Powell will put in an appearance before the Joint economic committee. Recent US economic data has been sufficiently resilient to keep the message at wait-and-see on the economy and market expectations for a December rate cut are moving toward nil, as the market is taking this after all as a “mid-cycle adjustment”. But the balance sheet discussion and congressional questioning into the Fed’s stance on its balance sheet could prove far more interesting, especially on any stronger indication from Powell that most Fed members expect a very limited time horizon of reserve building with the $60 billion a month of Treasury purchases, that will only continue until reserves are at a specific level. This might prove more hawkish than the market expects.
Chart: NZDUSD
Pity the kiwi trader as NZDUSD recently saw a very nice upside-down head and shoulders formation and a neckline break attempt that failed badly, but then bears have since been caught out here by the RBNZ suddenly waxing cautious on the need for further easing, which spike NZ short yields back higher and boosted the kiwi sharply higher. The 0.6425-50 area remains relevant to the upside if this rally holds and the USD strength fades again. Bears need to see this spike back higher quickly erased.
The G-10 rundown
USD – the greenback generally supported heading into today’s important Fed Powell testimony if he surprises on the balance sheet discussion. Otherwise, waiting for US-China trade deal status to ignite bigger trading ranges for USD pairs.
EUR – Yesterday’s ZEW survey suggests a stabilizing outlook for Germany while the current situation measures remained pegged near the multi-year cycle low.
JPY – yields have stabilized a bit overnight and offered the yen a boost, and the currency was already a bit resilient on Japanese long yields rising sharply lately, though much of yesterday’s rally was wiped out overnight – are yields at an inflection point a burning question for currencies.
GBP – sterling remains supported despite not terribly supportive data yesterday as the most recent data point – the October jobless claims, jumped 33k, matching the highest level in over eight years, while the September employment change was far less bad than expected at -58k. The run to new lows in EURGBP has been a cautious affair and hasn’t yet sparked fresh momentum.
CHF – Wolfstreet.com covers the SNB’s crazy accumulation of equities, to the tune of $100 billion – what this means for CHF is not directly discernible, but reserves would go up in smoke in a bad equity correction.
AUD – the latest Australia employment data up tonight and the most important release for the currency at the moment, due to the RBA’s focus.
CAD – the USDCAD pivoted higher, but isn’t exactly setting the world on fire as we await US-China trade deal news an relative economic developments, with the Bank of Canada inclined toward a precautionary cut to edge the BoC rate back slightly below the Fed rate if the next rounds of Canadian data are weak.
NZD – a big shock to the market overnight that could keep NZD rather bid in the crosses, especially in AUNZD if the AU employment data comes in weak.
SEK – awaiting the CPI this morning, but not seeing it as a major catalyst as the Riksbank is determined to edge away from negative rates – SEK needs fiscal stimulus in Sweden and a firmer Euro to put in a more determined show of strength than we saw recently.
NOK – Norway’s GDP nothing write home about as the mainland GDP slightly underperformed expectations at +0.7% QoQ - EURNOK still in limbo after failing to punch down through 10.05.
Today’s Economic Calendar Highlights (all times GMT)
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
