Global market sentiment: An upbeat session on Friday saw the S&P500 gain 0.6% to a fresh record high and the AUD and NZD perform well, while US bond yields fell. Fed Chair Powell’s speech was more dovish than markets had expected.
Interest rates: US 10yr treasury yields initially rose from 2.83% to 2.85% following the solid core durable goods data, but fell to 2.81% following Powell’s speech. 2yr yields mostly traded around 2.62% apart from a brief spike to 2.64%. Fed fund futures yields continued to price almost 100% chance of a hike on 26 Sep.
FX: Stronger equity markets and the Powell speech combined to depress the US dollar – down 0.5% on the day. EUR rose from 1.1560 to 1.1640. USD/JPY ranged between 111.10 and 111.50, the defensive yen the worst performer (alongside he USD). Outperformer AUD, which had earlier jumped on news Scott Morrison is the new Prime Minister, rose further from 0.7280 to 0.7345. NZD also rose throughout the evening, from 0.6640 to 0.6696. AUD/NZD extended earlier gains to 1.0987 before consolidating…..
Other Fed speakers (Mester and Kaplan) kept in line with the current Fed guidance of further gradual hikes though Bullard (non-voting) did maintain his more dovish slant.
US July durable goods orders again showed the frustrating volatility of the series. The headline fell -1.7%m/m (exp. -1.0%) but the measure that more appropriately relates to state of the economy rose (ex-defense and air) +1.4%m/m, and its June reading was revised up to +0.6%m/m from +0.2%m/m.
The PBOC stated that it had re-instated its counter-cyclical policy towards CNY and its fixing. This had been withdrawn earlier this year but PBOC said that they had now begun actively adjusting the counter-cyclical factor (CNY-positive)….
AUD/USD 1-3 month: The Aussie was very stable inside 0.73-0.75 from late June to early August, before finally breaking down to 19 month lows near 0.72 mid-August on Turkey-inspired global risk aversion. Such levels were quite oversold when judged by our short-term fair value estimate, which held nearer 0.75. AU-US yield differentials have been broadly stable in recent weeks, while Australia’s key commodity prices have been mixed, overall holding well within 2018 ranges. Still, AUD risks probably do still lie to the downside in September (sub-0.72), given the confluence of FOMC meeting, US review of China tariffs and EUR/Italy budget risks. During Q4 we see AUD back to 0.74. (23 Aug)
NZD/USD 1 day: The slippage in the US dollar plus strong risk sentiment should support the NZD above 0.6660 today.
NZD/USD 1-3 month: The US dollar should strengthen further if the Fed hikes further this year, and that will push NZD/USD lower. In addition, the NZ-US interest rate advantage has been eroded, removing one of the previous attractions of the NZD. Further, domestic data is indicating the NZ economy is slowing. We expect NZD/USD to fall to 0.64 by year end (13 August)
AUD/NZD 1 day: Expected to range between 1.0900 and 1.1000.
AUD/NZD 1-3 month: If US-China trade tensions subside, then AUD/NZD should continue rising during the next few months, relative AU/NZ economic growth favouring the AUD. The 1.1250 area (where it peaked in 2017) is a possible target. (10 Aug)
AU swap yields 1 day: The 3yr should open around 2.11%, the 10yr at 2.74%.
AU swap yields 1-3 month: With the RBA expected to be on hold for the foreseeable future short-maturity interest rates are well anchored. 3yr swap rates have been in a 2.10 – 2.35% range throughout 2018, and we would not expect that range to shift over the next few months. Longer maturity rates will largely follow US rates directionall
NZ swap yields 1 day: NZ 2yr swap rates should open unchanged at 2.02%, the 10yr down 1bp at 2.85%, in response to AU and US interest rates movement overnight.
NZ swap yields 1-3 month: The dovish signal from the RBNZ’s August MPS should resonate during the month ahead, 2yr swap rates with potential to test 2.00% but unlikely to run lower than 1.95% unless fresh evidence emerges to justify rate cuts. Longer maturity rates will largely follow US rates. (10 Aug)