Overview: While investors keep a watchful eye on the dollar fix in China (a little firmer than projected) and tensions with the US, two other developments compete for attention. The Reserve Bank of New Zealand and the central banks of India and Thailand surprised the market with lower rates. The RBNZ cut by 50 bp, India by 35 bp, and the fact that Thailand cut at all was unexpected. The other development was another horrific German industrial production report. Benchmark 10-year bonds yields are falling to new lows. Equities are mostly stabilizing, helped by the gains in the US yesterday, though Chinese, Taiwanese, and South Korean equities were exceptions. Europe’s Dow Jones Stoxx 600 is snapping a three-day, 5.2% drop, led by consumer discretionary and information technology sectors. US shares are flat to firmer. The US dollar mostly slightly firmer, but with few exceptions. Much to the frustration of Japanese officials, the yen remains well bid as the dollar cannot distance itself from the JPY106 area. The Australian and New Zealand dollars have been sold hard. The Kiwi is at new 3.5-year lows, while the Aussie is falling mostly in sympathy and is at its lowest level in a decade. The Indian rupee is steady to higher while the Thai baht is slightly slower. The dollar is firm against China’s yuan, but inside yesterday’s range. Gold is at a new high near $1500, and oil prices are a little lower after falling 3.7% over the past two sessions.
The Reserve Bank of New Zealand was widely expected to cut rates today, but the 50 bp was larger than forecast and officials gave no reason to think that this is the end of the road. It brandished the possibility of unorthodox policies if necessary. The new cash rate sits at 1.0%. The New Zealand dollar was holding near three-year lows around $0.6500 and fell through $0.6380 briefly today. This is its lowest level since January 2016 (~$0.6350). Resistance is seen near $0.6450. The Australian dollar was sold mainly in sympathy as many expect the RBA, which cut rates in June and July. Interpolating from the derivatives market, the odds of a September cut jumped to around 68% from a little less than 50% yesterday. The Australian dollar was sold to about $0.6680 before finding bids. Resistance is now pegged around $0.6750. The Aussie 10-year bond yield is below 1%, and the New Zealand benchmark is near 1.15%.
Two emerging market central banks surprised investors today. India’s central bank cut rates three times this year through June at 25 bp a clip at each meeting (every other month). A 25 bp rate cut was anticipated, but officials delivered a 35 bp cut instead. Market rates did not respond. The 10-year bond yield rose four basis points (to 6.38%), while the two-year was flat at 6.02%. Thailand surprised. Most economists did not expect it to cut rates today. It delivered its first rate cut in four years. The 25 bp move brought the key rate to 1.50%, effectively unwinding the hike from late last year. There is scope for another rate cut later this year. Thai interest rates fell, with the 10-year yield off 13 bp to 1.53% and the two-year yield down almost seven basis points to 1.53% also. The baht is giving back the gains scored over the past couple fo sessions.
The dollar eased against the yen in Asia and found some interest below JPY106.00. Resistance is seen near JPY106.50, which may be reinforced by a $535 mln option expiring there today. A stronger cap, backed by $2.2 bln in expiring options, is in the JPY106.95-JPY107.00 area. The onshore yuan gave back most of yesterday’s gain, and the dollar finished the mainland session near CNY7.0445. The PBOC set the dollar reference rate at CNY6.9996, a little above where analysts projected.
The 2.5% rise in German factory orders reported yesterday were a function of demand outside of Europe, while domestic orders fell. Industrial output, reported today, plummeted 1.5% in June, three-times the decline economists had expected. German industrial production includes construction, but without it, industrial output dropped 1.8%, dragged down by weakness throughout all the manufacturing categories. Germany reports Q3 GDP next week. The market had expected a small contraction, but after today’s report, the risk is clearly on the downside.
Little progress is being made on Brexit, which is seen to be bolstering the chances of a no-deal exit. The Johnson government insists on jettisoning the backstop as a pre-condition for talks. This is a non-starter. The UK government must realize that by this juncture. The idea that the problem was May’s government was not sufficiently forceful seems like a wide-of-the-mark assessment. With neither the EU nor the Johnson government appear to be dug into their positions, the third partner is not fully at the dance as the House of Commons is on summer recess. There is no doubt that a vote of confidence will be called in early September. If Johnson survives, it would seem to make a no-deal exit the most likely scenario,. But if he is defeated, a constitutional crisis (if it had a written one) would likely ensue as the Parliament challenges the Prime Minister.
The euro is consolidating within yesterday’s range though slightly lower on the day. Support is initially pegged near $1.1165 and then $1.1140. A break of this area would suggest a pullback toward $1.1100 is possible, but the intraday technical readings indicate this may not be necessary today. On the upside, the $1.1250-$1.1265 is a significant hurdle. Sterling remains uninspiring. It was capped a little over $1.2200 yesterday and is slipped through yesterday’s lows in late morning turnover in London. The low from last week was $1.2080, and it does not appear to be a particularly strong base.
St. Louis Fed President Bullard’s gravitas has risen. He was the sole dissent in June for a 25 bp rate cut. He swung a majority over to his view in July. Since Trump tweeted the end to the second tariff truce with China, the market has priced in more aggressive easing as the trade tensions are expected to further slow the US economy. Bullard yesterday played down the need more such a response. He stuck to his idea that only another 25 bp cut may be needed this year. The January 2002 fed funds futures contract implied a 1.40% effective average at the end of the year from 2.13% currently. However, with Bullard’s comments, the market drew back a little, and now the fed funds contract implies a 1.47% yield.
It had looked as if the US dollar was rolling over against the Canadian dollar, but in North America yesterday, the Loonie was sold by the most in six weeks, losing nearly 0.6% against the greenback. Follow-through US dollar buying today has lifted it above CAD1.3300 and its 200-day moving average. The driving force appears to be suspicions that with easier monetary policy throughout the world, and with more Fed rate cuts likely, the Bank of Canada will be unable to stay on the sidelines. Canada’s 3-month to 10-year curve is the most inverted (~40 bp) since 2000. It was flat three months ago. Canadian markets were on holiday on Monday and played a little catch-up yesterday, with the 1-year yield falling 14 bp to 1.24%, the lowest in nearly three years. The market is beginning to price in a cut by Canada in December.
The new highs for the US dollar above CAD1.33 were not confirmed by intraday technical indicators, and the daily readings are stretched. The area that is has tested coincides with a (50%) retracement of the greenback’s losses since May 31, and the upper Bollinger Band (two standard deviations above the 20-day moving average). The next retracement target (61.8%) is near CAD1.3355. We would be more inclined to take advantage of additional Canadian dollar weakness to buy, in anticipation of a technical recovery. The dollar spiked to almost MXN19.74 yesterday but lost the momentum and closed below MXN19.60. It is poised to begin the North American session near yesterday’s lows (MXN19.5350). A break of this area could see MXN19.40-MXN19.45. A move below the 200-day moving average (~MXN19.37) would likely encourage re-setting carry-trade plays.