Dovish RBA ignites AUDUSD bears

19 November 2019, AtoZMarkets – From the graph it looks like there was some movement in the FX market, but look at the scale – the biggest mover was AUD, whose trade-weighted index fell a massive 0.3%. Other currencies were mostly ±0.1%, which is barely worth discussing – just “Brownian movement” in the FX market.

AUD Weakens before RBA Minutes Release

AUD was weakening in the hours before the Reserve Bank of Australia (RBA) released the minutes of its 5 November meeting and then fell sharply afterwards – although AUD/USD has since rebounded to nearly where it was when the minutes came out. The minutes showed that “the Board agreed that a case could be made to ease monetary policy at this meeting,” but decided instead to keep rates steady “and to make another full assessment once more evidence of the effects of the earlier monetary easing had become available.” “Having already delivered a substantial monetary stimulus in recent months, there was a case to wait and assess the effects of this stimulus, especially given the long and variable lags,” they said.

Expectations of a rate cut rose slightly after the minutes were released, to 70% by August from 67%.

Personally, I think the market’s initial interpretation of this statement was wrong. I think we should be looking at the reasons they gave to delay, not the fact that they considered another cut, which was already known from the statement following the meeting. We’ve now seen the same sort of comment from several central banks, namely that it’s time to “wait and see” how the easing so far feeds through to the economy. Since it usually takes six to nine months for the effects to become visible, this means rates will probably be on hold for longer than the market expects. That would imply less likelihood of easing than the market expects, which would be positive for AUD, not negative.

The RBA (and other central banks) has also been discussing so-called “reversal rate” fears. This refers to the harmful effects that such low or even negative interest rates have on banks, on savers and on business confidence. A number of other central banks have been discussing this problem as well. I think this idea too raises the possibility of rates staying at current low levels indefinitely, as central banks fear to move them either way. That possibility would imply an extended period of low volatility in the FX market.

AUDJPY and USDCNY Analysis

The fall in AUD/JPY goes against the “risk on” mood in stock markets, which were generally higher in Asia, particularly the China-related markets. But USD/CNY rose sharply (well, sharply for USD/CNY) during the European afternoon yesterday thanks to  a tweet from CNBC’s Beijing Bureau Chief, who said that the mood in Beijing “is pessimistic” and that the “Strategy now (is) to talk but wait due to impeachment, US election. Also prioritize China economic support.” USD/CNY is now at 7.0250, up from around 7.0120 at the European opening yesterday, indicating that not everyone is convinced a trade deal is imminent.

Elsewhere in the market, while many central bankers are concerned about the “reversal rate,” ECB Chief Economist Philip Lane doesn’t seem to share those concerns. Yesterday he said that the ECB hasn’t yet reached the limits of its policy and that the current negative rates are “not particularly a super loose policy. If it were super loose, inflation would be higher.” He also implied that negative rates have been successful in driving corporates to increase their capital spending. While there is a debate on the ECB Council about the wisdom of further easing, Lane’s support suggests that it is a real possibility if the economy fails to recover. EUR negative

GBP continued to edge higher on hopes that the Conservatives get a majority. While the results of the election in terms of how many seats each party gets are still up in the air, the effective results are actually quite simple and binary. Since none of the opposition parties is willing to enter into a coalition with the Conservatives this time around, either the Conservatives get a majority or they don’t. If they do get a majority of the seats on their own, the UK gets Brexit on the terms of the previously announced Withdrawal Agreement. If they don’t get a majority, there will be a minority government and probably be a second referendum. It’s really that simple.

Fed Chair Powell met with Trump and Treasury Secretary Mnuchin

The Fed put out a statement following the meeting that was identical to the one they put out after a similar meeting in February, except for one small but significant change:

Chair Powell said that he and his colleagues on the Federal Open Market Committee will set monetary policy, as required by law, to support maximum employment and stable prices and will make those decisions based solely on careful, objective and non-political analysis. (emphasis added)

Gee, I wonder why they added that bit?

Curiously, the meeting apparently took place in Trump’s private quarters, not in the West Wing, where the Oval Office is. It seems all of Trump’s meetings yesterday, such as they were, took place there. No word on why he didn’t go into the office two days after he suddenly had an unscheduled “examination” at Walter Reed Hospital and was pronounced “healthy as can be” by the White House press secretary. And if I’m not mistaken, he doesn’t have any public appearances on his schedule today, either. Curiouser and curiouser.

Today’s market

Again, not that much on the schedule today. No major indicators or even speakers during the European morning.

The day’s indicators begin with another set of US housing market data, housing starts and building permits. The market tends to pay more attention to starts than to permits. Even though permits are the more forward-looking indicator, sometimes builders get permits but never start building.

Permits are expected to be down slightly, but starts are forecast to be up considerably – back to the middle of the recent range. In fact, that may be how people made their forecast:  the market consensus of starts at an annual pace of 1.32mn is strikingly similar to the average of 1.321mn for the previous two months. Hey, maybe I could be an economist too!

Yesterday’s National Association of Home Builders (NAHB) index was slightly disappointing at 70 (expected to remain unchanged at 71), although 71 was a 20-month high so a slight decline isn’t anything to get concerned about. Nonetheless, a rebound in starts, as is expected today, would reassure the market that in fact housing is responding to the 100+ bp decline in mortgage rates over the past year. USD positive

Overnight, Japan releases its trade balance. China is its major trading partner,  taking 23% of both exports and imports – far above #2, the US, which takes 18.5% of its exports but supplies only 11% of its imports. By contrast, China only takes 7% of Germany’s exports. Japan’s trade figures are therefore one of the barometers of how China’s economy is affecting the rest of the world. The figures are expected to show a return to a trade surplus, which should be JPY positive.

However, the (expected) details of the data don’t make for such exciting reading. The only reason the trade balance is expected to return to surplus is because imports are collapsing faster than exports. News reports say that exports of autos and motorbikes are falling, while imports of crude oil and LNG are down. That’s bad news for the economy, but since we don’t expect any change in policy in response, the net impact on the currency should still be positive.


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