Risk sentiment has improved with US equities modestly higher, the VIX index down to 11.5, global rates up a bit and a softer Yen. The NZD is weaker for no apparent reason, after its top-performing move in the previous session, while the CAD has surged ahead after a surprise rate hike.
In currency markets, the CAD leads the charge, with USD/CAD down 1.2% to just over the 1.22 mark and NZD/CAD down 1.8% to sub-0.88. The Bank of Canada raised its policy rate for a second time, taking it to 1.0%, which surprised the market with respect to timing. The Bank tried to hose down expectations of further tightening by citing risks including continued excess capacity, subdued wage and price pressures, geopolitics, the higher Canadian dollar and elevated household indebtedness, but this didn’t prevent the CAD surging further ahead. The bank didn’t repeat language from previous statements about the current degree of stimulus being “appropriate”, which the market interpreted as signalling further tightening ahead. The OIS market gives an 85% chance of another hike before the end of the year.
In key economic news, the US non-manufacturing ISM rebounded, although was a touch weaker than market expectations, while German factory orders unexpectedly fell in July. Neither figures had much impact on the market. In other news, Fed Vice Chair Fischer resigned effective 13 October, ahead of his term expire of June 2018, citing personal reasons, which resulted in a slightly weaker USD. But this was reversed as President Trump and congressional leaders agreed to measures that will extend the debt limit until 15 December, another classic case of kicking the can down the road, only delaying the potential showdown.
The NZD has trended lower since lunchtime yesterday for no obvious reason, other than unwinding the previous day’s strength. It currently sits just under the 0.72 mark. NZ First’s Winston Peters, potential coalition partner for the next NZ government, reiterated his party’s policy of devaluing the NZD by 15-20%, something he’d expect Labour or National to adopt. We doubt the market took much notice of that as the policy makes no sense with a freely floating currency. Furthermore, NZ’s TWI trades just below its 5-year average alongside near-record terms of trade so it’s not obvious that the NZD is fundamentally over-valued. We certainly don’t think it is.
The AUD fell slightly after Q2 GDP came in slightly weaker than expected but it trades flat for the day close to 0.80. The NZD’s underperformance overnight has seen NZD/AUD fall by 50pips to return to just below the 0.90 mark.
EUR and GBP are flat against the USD at 1.1915 and 1.3040. Tonight’s ECB meeting has been on the radar for some time and represents a key risk event for EUR, with market reaction unpredictable. The Governing Council will discuss options for exiting its QE programme, but there is doubt about how much information on this topic will be communicated at this meeting. The ECB will be trying to avoid a “taper-tantrum” and will be keen to hold back any further appreciation in the EUR for now.
JPY is on the soft side, given the move out of safe-haven assets. USD/JPY is up 0.5% to 109.30, reinforcing the view that the high 108s represents a key technical support level. NZD/JPY is flat at 78.6.
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