Non-Farm Payroll-May Anomaly
While the sharp edge of Non-Farm Payroll Day has been dulled by Brexit-driven volatility, none the less, traders will be watching the data intently. Specifically, they will be looking for a potential rebound from the dismal 38,000 jobs recorded in May, which the market interpreted as transformative for the Federal Reserve monetary policy.
In June, however, ADP reported that 172,000 private-sector jobs had been created , suggesting that the May nonfarm payroll report may be an outlier. While a strong June NFP report is not going to ring alarm bells for an imminent rate hike, a strong print tells the market that when the post-BREXIT dust settles, the door will be open for the Fed to resume a path of interest rate normalisation.
Australian Dollar – Credit Rating Woes
The Australian and New Zealand Dollars continue to rebuff risk-led selloffs and to trade robustly when risk turns on. Even when the S&P downgraded Australia’s sovereign credit rating, which likely caused traders to lighten some long positioning, it was quickly rebuffed and did not cause any real currency shock waves. While I expect the yield appeal to keep the AUD buoyant as the dust settles on the Brexit fallout, the rating agency credit woes will be smouldering.
Treasurer Morrison was quick off the mark to reassure the markets that Australia is committed to budget repair. However, it will be a very tough sell to table this very unpleasant fiscal decision through parliament. Given the political vacuum in Australia at the moment, it is hard to imagine that these budgetary concerns will be addressed anytime soon. Not acting swiftly on the Credit Agency warning could jeopardise Australia’s membership in the exclusive AAA club and could very well start to make a strong case for AUD short positions to re-engage.
New Zealand Dollar
The New Zealand Dollar (NZD) continues to trade resiliently in the wake of RBNZ’s Deputy Governor Grant Spencer’s speech on housing risks and macro-prudential policy. While a dated topic, Spencer implied that further Loan Value Ratio Tightening was on the table. In the past, such macro-prudential measure was judged to be a precursor for monetary easing. Instead, traders have focused on Spencer’s strongly worded Central Bank tagline, ‘further reductions in the OCR could pose a risk to financial stability through their effect on credit growth and house prices’. This statement was a real game changer in the current market, which is still focused on yield appeal.
The real story, however, is a huge move on AUDNZD, which has collapsed from 1.0550 to 1.0350 in the span of 24 hours. The market is factoring the combination of the S&P downgrade and RBNZ’s Spencer’s concern on further easing, which is causing heightened risk in the housing cycle in NZ.
OIL Prices- Oil Slide
The WTI has plummeted from the $48.00 area towards $45.00. Market participants were clearly disappointed when DoE inventories came out with a draw of 2.22mn. The Price drop occurred as the market was expecting a significant inventory drawdown in the wake of the API data, the day prior, which showed a draw nearly three times that amount.
USDJPY – Intervention Chatter
Overnight, USDJPY held above 100.60 after the Bank of Japan’s Kuroda spoke yesterday at the branch managers meeting, despite offering nothing new on the monetary policy or FX comments. However, the BOJ’s Finance Minister and FSR are meeting early today and as usual, intervention chatter is filling the interbank messenger systems. The meeting begins at 9:30 local time, which is 0:30 BST and for good measure, wire reports are hinting that Former Fed Chair Bernanke might drop in for the discussion.
There has certainly been a reluctance to test the BOJ’s resolve at the 100 level post-Brexit. That is telling me the market is anticipating Yen selling intervention below that level.
However, realistically, even if the BOJ intervenes in this current highly risk-averse market, it is unlikely the BOJ could push the market beyond 104-105 before the market comes back full bore to JPY buyers. I suspect BOJ intervention will only offer better levels to buy JPY and will not dissuade traders from taking the plunge to 95. For intervention to work it needs to be in concert with fiscal stimuli to slow the JPY appreciation and once the Brexit dust settles, we will likely see a halt to the USDJPY decline.
YUAN – Calm
Alarm bells are sounding that the levels of Non-Performing Loans are accelerating and are expected to rise in the near terms, which is reigniting fears of a horrible “Asset Bubble”.
On the currency markets, the PBOC has found a happy spot in the wake of the Brexit Fallout. Not only has the RMB casually retreated, but it has done so without any sense of panic nor ignited any rush in capital outflows. The shift to a more transparent peg has eased investor nerves as the daily fix has become more predictable in that sense. However, at some point, further weakening in the RMB complex will unboundedly trigger a new wave of capital outflow.