Rates as of 05:30 GMT

 

Market Recap

My “first shall be last” paradigm broke down yesterday --- JPY, the 2nd-to-last currency when I wrote Tuesday morning, was indeed the best-performing currency today, but AUD, which was the best performing currency yesterday, did well today too -- #2. But we’re looking at the trade-weighted indices and so AUD’s good performance is probably more of a reflection of NZD’s bad performance after the Reserve Bank of New Zealand cut rates 25 bps, the first G10 central bank to take that step in this stage of the economic cycle.

The meeting was the first under the new central bank governance system at the RBNZ and was accompanied by the minutes of the meeting. Those minutes said that “After discussing the relative benefits of holding the OCR and committing to a downward bias, versus cutting the OCR now so as to establish a more balanced outlook for interest rates, the Committee reached a consensus to cut the OCR to 1.50 percent.” In other words, they cut rates but now have a “more balanced outlook” on rates. This implies that it’s not necessarily the first step on a rate-cutting cycle, but neither is it “one and done,” either. Bloomberg calculates that the market puts a 41% probability of another rate cut by September and no chance of a hike – so much for the “balanced” outlook. Indeed, the central bank’s own projections show the rate falling to 1.36% by 3Q 202, vs 1.75% now – so one more rate cut is pretty certain and then a 50-50 chance of another.

As usual recently, the move during Asian time was probably overdone and some profit-taking or new NZD longs are likely during today’s trading. However longer term, the likelihood of lower rates is likely to continue to undermine NZD. That may be entirely to the RBNZ’s liking.

As for JPY, its performance was wholly understandable in light of the 1.5% fall in Tokyo stocks and continued carnage in Asian stock markets – every market in the region is down this morning.

Elsewhere, note that GBP continued to weaken as hopes for a cross-party Brexit deal with Labour faded. PM May is now setting 1 August as its target for B-day. Personally, I’m waiting for Oct. 31st myself. GBP negative

 

Today’s market

There’s little of major interest on the schedule today. ECB President Draghi is scheduled to speak, but that’s just “Youth Dialogue with the President on the occasion of the Generation Euro Students Awards organized by the ECB.” I doubt if he’ll say anything more than “good job, kids,” or something like that.

Overnight we’ll hear more from RBNZ Gov. Orr when he testifies about the Monetary Policy Statement at the Parliamentary Select Committee on Finance & Expenditure. But he’s already had a press conference so probably not that much new here, either.

China will announce its inflation data. The producer price index (PPI) seems to have bottomed out and is trending slightly higher. The sharp decline in prices may have been partly due to companies cutting their prices to remain competitive in the face of US tariffs. An upward trend in the PPI now could indicate that that phenomenon has pretty much run its course for now. Less price cutting by China would help to support prices globally – it would therefore tend to boost the currencies of those countries whose central banks are under pressure to cut rates. Let’s see, that includes…everyone? Probably US, New Zealand and Australia would be the main countries impacted.

The China CPI data is less important globally than the PPI data. In any case it’s surprisingly steady given the toll that African Swine Fever (ASF) has taken on the pork industry there. China’s Ministry of Agriculture and Rural Affairs estimates that the number of pigs in the country has fallen by 19% yoy as farmers cull their herds. Pork production could fall as much as 25%-35% this year. Poor pitiful piggies!

 

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Marshall Gittler

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