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Safe havens (JPY, CHF & Gold) remain in demand even as sentiment recovers late in the US session; Fed’s Evans sees more rate cuts

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-->Safe havens (JPY, CHF & Gold) remain in demand even as sentiment recovers late in the US session; Fed’s Evans sees more rate cuts        

 

  • Another rout in risk sentiment overnight before a late recovery sees S&P trade over 2% lower, USDJPY once again trading with a 105 handle, CHF making new lows versus USD, EUR, GBP and commodity bloc, global bond yields hitting new lows (UST 10Yr yields briefly trading below 1.60%, Bunds below -0.60%, 10Yr JGBs below -0.20% - below the BoJ’s corridor and AUD 10Yrs hitting sub 1.0%), Gold testing 1500, Oil (WTI) testing lows at 51.09 and the US 3m10y curve continuing to invert further, testing -40bps and the 2y10y curve breaking below 8bps, for the first time since 2007 before reversing.    
  • The overnight rout comes as three central banks cut rates in Asian time (RBNZ, RBI and BoT), adding to fears of a global synchronized slowdown and a race to the bottom of the interest rate cycle by central banks. Then follows a defiant tweet courtesy of @realDonaldTrump, firstly firing a salvo at the Fed (yet again), saying “three more Central Banks cut rates. Our problem is not China….Our problem is a Federal Reserve that is too..… proud to admit their mistake of acting too fast and tightening too much….”. and then on China, downplaying the impact of recent China escalations on the market saying “the market reaction is to be expected,”….“I might have expected more.”      
  • Further trade headlines aid these moves as the Trump Administration announces a new rule to ban federal agencies from buying telecom, video surveillance equipment or services from five Chinese companies including Huawei. This goes into effect August 13. A second stage - a broader ban - is planned on Aug’20. While the news is not completely unexpected and still gives room for contractors to apply for waivers, to China this reads as escalation. 
  • Fed President Evans remains dovish and his comments, courtesy of Reuters, include – (1) taking note of rate cuts in Asia to digest "everything that is going on" and looks to data and business commentary to determine if more accommodation is needed; (2) Sees a "mid cycle adjustment" as Fed now aiming for 50bp below neutral versus 50bp above. Sees long-run neutral at 2.75%; (3) Says "we have to pay attention to volatility" amid trade tensions and cutting rates further could be reasonable. On the basis of low inflation alone, more policy accommodation is needed. Policy works better when Fed members are united on a decision.      

 

More shocking data out of Germany; Brexit – no signs of movement from either the UK or EU     

  • In data overnight, Germany: industrial sector output collapses in 2Q-19 – industrial production falls by 1.5% MM June and by 1.9% QQ in 2Q – the fourth negative quarterly print in a row and the worst since 4Q-12 that could potentially see German 2Q-19 GDP post negative growth.  
  • Irish PM warns that negotiations will likely go on for years even in the event of a 'No Deal'. No-deal talks are rapidly drowning out any discussion about alternatives both on the UK and the EU sides, as both try to increase pressure on the other to ‘blink’ first                

          

A “shock” 50bp rate cut by RBNZ adds to fears about a synchronized global slowdown         

  • RBNZ shakes markets yesterday with an unexpected 50bp insurance cut based on global worries. Key highlights  - (1) RBNZ cuts 50bp to bring the cash rate to a 1.00% low; (2) Says offense is the best form of defense to better guarantee what is largely unchanged growth and inflation forecasts over next few years; (3) Cites more concerns around global downside risks and growth headwinds and potential impact on the NZ economy via the trade channel; (4) Says the neutral rate of interest has fallen, necessitating a lower OCR to provide the appropriate degree of policy accommodation; (5) There is no forward guidance for further cuts and OCR projections are lowered only by 50bps in 2020 to a trough at 0.9% which probably suggests no further cuts with the next move projected to be a rate increase at the end of 2021. That said, Governor Orr does not rule out future action, in comments made in the Q & A; (6) Slashes export growth forecast for 2020 from 2.5% to 1.3% and cuts non-residential private business investment forecast from 3.4% to 2.5% for 2020 and from 5.1% to 4.0% for 2021; (7) However, there is no change to the RBNZ’s 3.1% 2021 growth forecast and in fact, there is an upward 0.1pp revision to 2.6% for 2022 GDP forecast due to an expected rise in public spending.
  • Citi analysts base case - 1.00% to be the RBNZ OCR trough in this cutting cycle and Citi analysts also remove downsides risk to NZ growth forecasts of 2.7% for 2020.   

 

Risk aversion sentiment still elevated despite the late recovery in US markets overnight 

  • CNH brings all the major China related event risk Thursday. Other than the 9.00am (Singapore time) daily CNY fix, top signposts to watch include China’s July trade report and China’s custom department’s rare earth export data release.   
  • And notwithstanding the late recovery in US markets overnight, EM markets remain nervous due to the "Currency Manipulator" tag on China by the US this week and the prospect of further weakness in RMB, given the narrowing domestic policy room for China.  The PBoC also employs its counter-cyclical factor to curb volatility in the Yuan. If however, policymakers were to de-activate the counter-cyclical factor, it would represent another meaningful escalation in the trade war”  

 

This is an extract from the Daily Currency Update, dated August 8, 2019. Please approach a Citigold Relationship Manager if you would like more information.

 

 

 

 

 

 

 

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