Goldilocks And The 3 Central Banks
MarketPulse | Jul 11, 2016 01:54AM ET
Non-Farm Payroll- Just What the Doctor Ordered
A market-friendly NFP is just what the Dr. (Yellen) ordered, and the economy delivered. While the US equity market response is encouraging, it is important not to factor too much into one single monthly report. Certainly, more data is needed to confirm that the dismal May jobs report was an aberration. Also, while the June Report surprised, it still only adds up to a two-month average of 150 K new jobs, leaving the Feds with a Goldilocks dilemma as the data was neither too weak nor too strong to alter the near-term US interest rate trajectory. However, it does leave the door ajar for a possible rate hike once the Brexit noise abates
Australian Dollar – Carry On
The Australian and New Zealand dollars continue to trade resiliently on the coattails of high demand for carry trade versus both the EUR and GBP. The New Zealand dollar continues to outperform in the wake RBNZ Spencer’s speech on the housing markets when shortly after the New Zealand interest-rate curve wiped off 10 BPS( ~ 45 % probability) of easing over the near-term horizon. As for the RBA, the market may have underplayed just how relatively hawkish Governor Stevens post-OCR comments were as local investors were struggling to see the forest for the trees, given the Brexit aftershocks.
Also, the political vacuum noise in Australia has diminished significantly over the past 48 hours, and the political landscape is looking slightly more stable with the Liberals now set to return to government with a slight majority. From a budgetary perspective, this will ease concerns of across the political floor squabbling, extend debate and delays when it comes time to table a very unpleasant budget to address both the Deficit and Credit Rating Agency concerns. Given the political “tailwinds” we may see the Aussie play a little catch up with its Tasman Sea neighbour this week
In the meantime, the Australian Dollar is enjoying its high beta to global risk appetite, along with a close correlation to commodity prices. Hard commodity prices continue to trade in the Goldilocks zone. Neither bullish nor bearish. Local miners continue to enjoy the Brexit driven Gold-price resurgence. But most significantly, AUD bulls are basking in the fact Global Central Bankers are committed to making the global capital markets a happy place by flooding the financial system with money. From both a risk and carry perspective, it is not hard to see why the AUD has flourished and continues to trade resiliently with the demand for carry adding support to any currency dips.
The next hurdle will be the Domestic Unemployment Rate released on Thursday with current forecasts looking for a slight increase in the Unemployment Rate to 5.8% from 5.7% prior.
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The Limelight – GBP and JPY Dominate
Sterling and the yen continue to hog the limelight as the Pound remains under immense pressure and JPY, despite Tokyo’s admonishment, continues trading on a skewed conviction
GBP- No Sign of Trend Reversal
The pound continues to trade poorly after three consecutive weekly nosedives. However, measuring by any standard, the Sterling Short positions are very much over stretched. However, there is no sign of trend reversal. At the very best, Sterling flow remains a touch mixed as the market continues consolidating below the GBP/USD 1.30 levels. Nevertheless, given the current Brexit headwinds, including more Property Funds halting redemptions along with US payrolls data offering little complication, the downside remains overwhelmingly intact. As such, expect relief rallies above 1.30 to be quickly faded.
Adding to the Pounds heavy tone, the Bank of England is projected to slash interest rates this week. While some debate lingers on whether July or August is the likely time, Mark Carney is unlikely to shy away from a July rate cut, as he appears to relish the media spotlight status as the Canadian with his finger in the Brexit dyke. However, realistically, since the BOE has already signaled a rate cut there is little point holding off another month.
JPY-Bazooka Time Nearing?
One would have expected a bigger bounce on USD/JPY after Friday’s spectacular Non-Farm Payrolls, but there was only a fleeting reprieve, and the YEN eventually chalked up a gain of nearly 2 % against the greenback last week. USD/JPY’s lack of bounce on the payrolls or even a convincing move higher on supportive risk appetite has me questioning the safe-haven risk-off narrative that’s dominated investor psyche this year. Speculative flows are not overwhelming as measured by the CME Commitment of Traders, and one can only conclude that there may be some truth to the market chatter that long-term Yen Short Hedge positions entered when Abenomics took flight are unwinding en masse.
Wherever the truth may lie, the bottom line is the moves in USD/JPY, and the Nikkei are becoming a major problem for not only Tokyo but also the broader global Capital Markets making the next Bank of Japan monetary move so critical. Is the BOJ out of ammunition or are they preparing to fire off a major Bazooka? After Friday’s MOF/BOJ/FSA meeting with former Fed Chairman Bernanke at the table, there is no shortage of smoke signals and with the market leaning towards a move to 95 YEN, intervention may not be far off. Not only currency intervention but also a double-barreled barrage including helicopter drops and some new form of alternative policy that may have been in the works for some time. The question now is this the week the market tests the BOJ resolve and probes below 100. Could shape up to be an exciting week on JPY trading desks.
ON the political front the ruling coaliting won the Upper House election held in Japan yesterday. Despite the show of support for the LDP party headed by Priminster Abe, there was minimal effect on USD/JPY at today’s open as the USD/JPY downtrend remains thoroughly entrenched.
YUAN-GDP the Key
Chinese government data showed consumer prices in June rose at the slowest pace in six months coming in at a tepid 1.9% and the data suggests that Consumer demand remains weak as the mainland economy continues to struggle with its rebalancing act. On the monetary policy front, it sets up Fridays GDP print as a hugely important release. First-quarter GDP came in near expectations of 6.7 % but if the Q2 GDP comes in below expectation of 6.6 % the market will aggressively position for near-term monetary policy easing with additional fallout weighing on RMB complex.IN the meantime, local attention will focus on Wednesday’s China Trade Balance. It’s has been a soft trade performance across the region this year due to slowing Global Demand, but the data will provide the markets with a snapshot of the current economic health of the Mainland Economy. Based on prior PMI sub reading, the export sector is expected to have contracted in June
On the currency front, the slowing Mainland Economy continues to be a focal point for traders, and it’s expected the Pboc will accept a gradual depreciation on the Yuan to offset any potential post-Brexit shocks while providing support to the struggling export markets.
MYR-Constructive Price Action
The ringgit moved constructively post NFP, and we could see further gains as local export economies will benefit from lowered expectation of negative growth risk after the supportive Nonfarm Payroll. Also, the market is relying on an extended run of easy monetary policy from Global Central Bankers; we may see some positive follow through on the MYR this week.Finally, there is the BNM Policy Rate Decision this week, but we expect no change in Central Bank’s Monetary Policy stance. ON a negative note for the Ringgit. Oil prices continue to trade with a soft tone as oversupply concerns resurfaced last week.
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