RBNZ Moves Ahead Of The Queue, Will The Bank Of Canada Maintain Its Place? |

The Reserve Bank of New Zealand jumped to the front of the queue of central banks adjusting monetary policy by the end of its long-term asset purchases.

New Zealand’s s benchmark yield jumped seven basis points, and the was up almost 1%, to lead the move against the greenback today. was up around a quarter of a percentage point after it reported a larger than expected rise in CPI.

Most of the other major currencies, but the and were posting small gains. Emerging market currencies were also narrowly mixed, leaving the JP Morgan EM index virtually flat on the session. Of note, ahead of Turkey’s , the stabilized after rising for the past four sessions.

Equity markets were struggling today. The fell for the first time this week. Of the large markets, only and indices gained.

Europe’s Dow Jones was also threatening to post its first loss of the week. US futures were little changed.

The US yield slipped lower after yesterday’s unexpectedly strong CPI print, but reversed with the help of a poor that generated a four basis point tail, the biggest this year. The benchmark yield was off a couple basis points today and was back below 1.40%.

European bond yields were little changed, though, on the back of a strong CPI report, the 10-year Gilt yield was up four basis points. was firm, within yesterday’s range, around $1815. prices came back softer after yesterday’s 1.5%-1.7% gain. Industrial metals were mixed. Iron ore prices rose for the third consecutive session, while prices were heavy and have not risen this week. The Index rose yesterday for the fourth consecutive session.

Asia Pacific

The Reserve Bank of New Zealand met and surpassed the more hawkish shift in market expectations. It announced that its long-term asset purchases were no longer necessary and will stop these operations by the end of next week. Its statement dropped the reference to the need for patience to achieve its dual mandate.

The market had been leaning toward a rate hike in November and solidified those expectations today. Some aggressive participants may see a hike at the Aug. 18 RBNZ meeting. Note that at the end of this week, New Zealand reports Q2 CPI. The year-over-year rate is expected to rise to from 1.5% in Q1.

Australia reports June employment data tomorrow. The tight border restrictions have helped the labor market recover. It filled full-time positions in May but cannot maintain that pace. Sydney’s lockdown has been extended another couple of weeks, but Westpac’s measure of consumer confidence improved from June ( vs. -5.2%).

Separately, South Korea, Indonesia, and Malaysia were reporting a record number of COVID cases. Meanwhile, Japan’s May industrial output was revised lower. Rather than contract by 5.9% on the month, as initially reported, it fell . The BOJ’s two-day meeting starts tomorrow and today’s data reinforced ideas that it will revise down its growth forecast from its previous projection of 4%  growth.

Elsewhere in the region, South Korea reported its fourth consecutive month of jobs , while Singapore’s economy contracted by in Q2, a little more than expected, after a 3.1% quarter-over-quarter expansion in Q1. 

The US dollar edged up to a four-day high (~JPY110.70) against the . It clipped the 20-day moving average but has stalled. Recall the dollar hit a multi-week low last week near JPY109.50. Nearby support was pegged around JPY110.20, and there was an option for $415 mln struck at JPY110 that expires today.

The peaked in late Asian turnover near $0.7470 and was sold toward yesterday’s lows around $0.7430. The low for the year was set last week close to $0.7410. The $0.7380 area corresponds to the (61.8%) retracement of the aussie’s rally since the end of last October.

The slipped fractionally lower today, its first loss in four sessions. For the first time in several days, the PBOC’s dollar fix was tight to expectations (CNY6.4806 vs. median in Bloomberg’s survey for CNY6.4808). China reports Q2 GDP first thing tomorrow in Beijing. The economy is forecast to have expanded by in Q2 after a 0.6% quarter-over-quarter expansion in Q1.


May’s industrial output fell in the eurozone, and April’s 0.8% gain was shaved to 0.6%. Given the miss in Germany ( vs. median forecast of +0.5), France vs. +0.8%), and Italy ( vs. 0.3%), a weak report was not particularly surprising. What may not be fully appreciated was the drag from the auto sector.

German auto output fell for a fifth consecutive month in May. The 3.4% drop in capital goods in Germany was led by a 7.2% fall in vehicle output, which was off more than a quarter from pre-pandemic levels. While the shortage in semiconductor chips has been well-document, supply problems extend to steel, copper, wood, and plastics, according to reports.

The UK’s June CPI rose on the month, more than twice expectations, and lifted the year-over-year rate to when owner-occupied costs are included from 2.1% in May. Excluding food and energy, core prices were higher than a year ago, up from 2.0% in May.

The biggest monthly gains occurred in household goods (1.4%) and transportation (1.3%). Those sectors also saw the largest year-over-year increase (3.3% and 7.3%, respectively). Of the 12 sectors, only food and non-alcohol drinks were lower year-over-year and only housing (1.9%), health care (1.6%), and the miscellaneous category (1.2%) after up less than 2%.

The Bank of England meets Aug. 5, and despite the stronger than expected rise in today’s report, there was little in it to challenge the idea that officials subscribe that the price pressures stem largely from the re-opening up of the economy (though masks will be required on the tube after next week’s economy-wide re-opening) and from the base effect.

The was trading quietly below $1.18. In fact, without more gains in the remainder of the session, it could be the first since early April that the euro has not traded above $1.18. There was an expiring option today for about 760 mln euros at $1.1810. The euro fell to almost $1.1770 yesterday after the US CPI, and it has held so far today. The year’s low set at the end of March was closer to $1.1700.

Similarly, sterling was sold to $1.38 yesterday, and it was also holding today. It reached the session high near $1.3860 after the inflation report. Resistance was seen in the $1.3880-$1.3900 area.


US June CPI soared. The headline and core rates jumped to and , respectively. Despite the claims by pundits, it does not resolve the debate about the durability or transitional nature of the price increases. The fact that it is not only food and energy prices that have risen sheds little light on the debate.

The case for it being temporary, 1) the price increases are not broad. About two-thirds of the items measured by CPI are up less than 2% year-over-year, and 2) many of the prices that have risen by more than 2%, like rents, airfares, apparel, saw hits last year. The increase in used vehicle prices again accounted for about a third of the June rise in CPI.

As we have noted before, the wholesale market for used vehicles appears to have eased, and the consumer market can be expected to follow with a lag. Used vehicle demand is partly a function of fleets (wholesale) and partly a squeeze on the production of new cars and, in particular, a shortage of semiconductor chips. It also seems to reflect the lingering distrust of public transportation (e.g., subways and commuter trains).

The US sanctions on China’s largest chipmaker and the largest chip buyer have added another dimension to what appears to have been a shortage of chips and some inventory management issues. The rise in energy prices is also not simply the result of the pandemic. Supply restraint by OPEC+ and the financial hardship of US shale producers, some of whom survived by selling options on this year’s output, and face a tougher loan market, have played an important role.

As we have observed before, the notable caveat was that the last three economic downturns in the US were preceded by a doubling of oil prices. They have done so again since the end of last October. The ECB’s July 2008 rate hike, largely because the price of oil rose to around $160 a barrel, is a good reminder that the threat posed by the dramatic rise in oil prices is not inflationary.

Although Fed Chair Jerome Powell will likely be quizzed about the jump in inflation as he starts his two-day semi-annual testimony before Congress (House panel today, Senate panel tomorrow), he will stick to the script that comes from the recent . The Fed has acknowledged that inflation is running higher than it had expected, and that was before the June report.

Even if Powell was having second thoughts about the transitory nature of prices, this is not the forum or time to express them. As an aside, at his following the FOMC meeting, Powell used lumber prices to illustrate the temporary nature of the price increases. The July contract tumbled 12.5% yesterday, its fifth consecutive drop, during which time it has fallen by a quarter to below $600 for the first time since last November. 

Powell may be in the hot seat, but Bank of Canada Governor Macklem gets the early attention. Even though Canada lost full-time jobs each month in Q2, the economy is poised to jump out of its slump. After expanding at an annualized rate of 5.6% in Q1, it may have expanded at less than half that pace in Q2. But that is history, and the Canadian economy is set to reaccelerate here in Q3.

The median forecast in Bloomberg’s survey is for 9.2% annualized growth, followed by 6% in Q4. The Bank of Canada announced it would reduce its bond-buying to C$3 bln a week at the April meeting and brought forward the closure of the output gap to H2 22.

The Canadian dollar peaked in May and early June near $0.8333 (CAD1.20) and since pulled back nearly four cents (CAD1.26), giving back nearly everything recorded in response to the April meeting. While Macklem can softly backpedal if needed, but on balance, many expect him to maintain the forward guidance from April and taper further.

The speculative gross longs in the futures market were cut by 20k contracts over the past five reporting weeks through last Tuesday to about 70k contracts. This compared to about 48k contracts before the April Bank of Canada meeting. As of the end of June, the bears’ gross short position had dwindled to a four-year low of 22.5k contracts. It rose to 28.7k contracts in the first reporting week in July.

The implied three-month vol was around 7%, the upper end of its trading range since the end of Q1. The put-call skew (risk-reversal) favored the USD calls by nearly 1%, the most in a year. This seemed to suggest USD calls were bought, likely as a hedge to long CAD exposure.

The US dollar was in a narrow range against the ahead of the Bank of Canada (~CAD1.2490-CAD1.2525), hovering in the upper end of yesterday’s range. A short-term trendline comes in near today’s high, and a break of it could see the greenback test last week’s high near CAD1.26. A small shelf has been created around CAD1.2440, and its violation could mark the end of the US dollar recovery that began in early June.

The rose to a four-session high of almost MXN20.0820 yesterday and settled above MXN20.00 for only the second time in the past three weeks. The US dollar came back offered today and was below MXN20.00. Support was seen in the MXN19.80-MXN19.85 band.

The Chilean central bank is expected to hike its overnight target rate to from 0.50%. June CPI, reported last week, accelerated to 3.8% year-over-year. A little less than half of the ‘s year-to-date decline of around 5.1% has taken place this month (-2.1%). The US dollar rose to its best level against the peso last week (~CLP759.50) and settled yesterday slightly above CLP750.

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