Sleepy markets but about to get interesting
It was a quiet session overnight, as both Asia and London were on holiday and New York was unable to muster any steam. Despite the slow start, this week’s diary picks up with an important RBA meeting today, FOMC mid-week followed by the granddaddy of economic data on Friday – the key US Nonfarm Payrolls report. On the Trump watch, investors took some relief that House and Senate representatives have reached a USD1.1t trillion deal to fund the government through the remainder of this fiscal year. While on the currency markets, with little fresh to gather from the overnight markets, the two main impressions were the resilience of the AUDUSD, now trading above .7500, and USDJPY now within striking distance of 112.00.
The Australian dollar is discernibly higher this morning, suggesting that pre-RBA Rate Decision flow is skewed towards a stronger response from the RBA than had been anticipated. Despite recently trapped in a downtrend due to trade and commodity factors, last week’s slight CPI miss and recent employment data are supporting the view the RBA will lean more towards the next move a rate hike than a rate cut. For this week at least, it appears domestic factors are trumping external factors for the Aussie dollar.
Later in the week, the Federal Reserve Board are unlikely to alter policy, but with the string of subpar economic data, the urgency for increasing interest rates has lessened somewhat, so the market does view a play on the tale of the two central bank themes. But for June US rate hike probabilities it likely comes down the firmer wages component of the NFP data which should get the dollar bulls excited.
Despite weaker US economic data overnight, the market is still in risk catch up mode with the French election uncertainty all but diminished. Also, the US funding extension will keep market expectations high, so that we could see a deal on Obamacare, which could make a path for Tax Reform. IN addition, US bond yields are firmer after the US treasury announced they would increase borrowing supporting 10 years differentials.
The BOJ minutes indicated little new, and while currency concerns are not within the BOJ’s overall purview, the Yen’s near to medium term tangent to be determined by interest rate differentials., the BOJ was cautious to avoid any language that could be misconstrued as an adjustment toward tapering or monetary easing. Members agreed that inflation lacks strength, but the economy continued to recover moderately.
Oil prices declined overnight, hobbled by a report of high Libya oil production and from fallout from Friday’s Baker Hughes report of another increase in drilling rigs. Supply concerns continue to weigh negatively.