The USD and UST yields continue to head north as the market becomes more convinced of Fed hikes ahead. There have been no top tier data releases in the US this week, but Fed speakers have been in force and the general message continues to be one of little change to the economic outlook, despite the soft Q1 GDP data. The Fed’s George saw risks from delaying gradual rate hikes. Both George and Rosengren favoured beginning the process of balance sheet normalisation this year.
The USD major currency index has tacked on another 0.4%. The weakest performer has been the Yen, with USD/JPY up through 114 – it has been a steady rise in the cross since the low just above 108 around mid-April. In Parliament yesterday, Governor Kuroda indicated that the BoJ needed to continue the BoJ’s “powerful” monetary easing and that further adjustments of policy were possible if needed.
The positive risk sentiment environment is also not helpful for the yen. The VIX index closed at its lowest level since December 1993 yesterday. It has nudged up slightly today but remains below 10, while US equity markets flirt with fresh highs.
The AUD probed fresh lows since January after much weaker than expected retail sales data for March and the Budget last night. Some support has been found around the 0.7340 mark, down around 0.7% for the day. The market has range-traded since the Budget release. While near-term deficit projections were higher than expected as the government ramps up its infrastructure spending programme, the accounts show an eventual move into surplus by 2020/21. Importantly, it hasn’t rattled the ratings agencies, with Moody’s and Fitch issuing some modestly improved language that support Australia’s AAA rating. A new bank levy on big bank liabilities is expected to raise over $6b in four years. The move would encourage higher retail deposit rates and likely higher mortgage rates to protect margins.
Amidst a strong USD backdrop, the NZD has slipped below 0.69. With the NZD showing some modest outperformance on the crosses over recent days, some hot money might be lightening up on short NZD positions ahead of Thursday’s MPS. It is well acknowledged that the RBNZ’s previously espoused “neutral” policy stance is looking stale, and much higher inflation projections will see the Bank bringing forward projected rate hikes. Such hikes are likely to remain over a year away and well below current market pricing, but a shift in that direction would represent a turning point in the Bank’s stance.
NZD/AUD has risen for the seventh consecutive day and has found some (temporary) resistance just under the 0.94 mark. A soft yen sees NZD/JPY up to 78.7. EUR continues to come off the boil following its strong run into the second round of the French Presidential election. It trades this morning down 0.5% at 1.0870. Modest NZD outperformance sees NZD/EUR up to 0.6340.
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