Post-Brexit Highs and Quandaries
A post-Brexit range is coming into a semblance of order. The market is seeking to determine a new symmetrical level for both the pound and Japanese yen. While the next JPY trend is destined to be created on the back of Tokyo’s fiscal and monetary stimulus, the pound is still in a quandary, unable to escape Brexit downdrafts.
Emerging: The market is pricing in a greater probability of a Fed rate hike in 2016. To be exact, US interest rate futures are pricing in a 40% chance of a 25bps hike in December. The accelerator has been an intense round of US data on the heels of strong June employment figures; Friday’s US retail sales and industrial production numbers both beat expectations.
Geopolitics: Market reaction to the attempted coup in Turkey was predictable. Equities tanked, and the safe-haven appeal for both USD and JPY dominated Friday’s closing with G-10 sentiment. The weekend brought clarity as the military attempt to wrestle power was thwarted, and some semblance of normality has returned to the Bosporus.
Given that sentiment is extremely fragile post-Brexit, geopolitical events of this nature expose market investors to short-term overreaction effects. Turkey’s Central Bank was quick off the mark to reassure investors that “liquidity without limits is in force”. Emerging market risk is improving, but in early trade, the Turkish lira is predictably lagging due to investor sentiment.
Better than expected data came out of China last week, with the headline Q2 GDP leading the charge at 6.7%, which beat the expectations of traders and most economists who had anticipated further slowing, but it is not all a bed of roses.
Economic surprises came on the back of surging bank loans, which illustrates that the mainland has little intention of addressing leverage issues which are threatening to balloon out of control as the economy continues to slow down. China appears unfazed by the frenzied pace of new loans, and if the economy continues to sour as expected post-Brexit, both a credit and asset-price bubble may be ready to burst.
USD/JPY
The market on USD/JPY has tentatively powered above pre-Turkey coup levels as fragile investor risk sentiment slowly returns to the market.
The Turkish lira recovered nearly half of its Friday losses as traders tentatively re-entered long Turkish lira, short Japanese yen carry trades.
The main driver continues to be Japanese monetary and fiscal policy themes, which should contribute to both yen weakness and surging equity markets. While geopolitical risk has accelerated, short-term market overreaction effects will likely give way to the Tokyo stimulus narrative as the week moves forward. Now is the time that the actions of Japanese policymakers need to speak louder than their words.
The Australian dollar made a new short-term high after the unexpected bounce in Chinese Q2 GDP figures, but later gave way to stronger US economic data and further fell on the Bosporus risk-off narrative.
While risk sentiment has improved this morning, the AUD rally has been less than convincing. The trend is looking fatigued, especially as expectations of Fed repricing gains momentum along with strong economic data out of the USA.
The next primary Australian dollar driver will be the domestic Q2 CPI figures. Much-anticipated, in the lead up to the release of this economic print there will be a tendency for traders to sell into upticks, as there are expectations of moderate inflation, which could lead the RBA to cut interest rates, as the Central Bank did after the Q1 CPI disappointment.
I expect near-term ranges to hold ahead of tomorrow’s release of the RBA board meeting minutes. With no clear bias in the RBA’s July post-meeting statement, the report will get a fair bit of attention as the August rate cut is by no means a given, based on the RBA’s July neutrality.
The New Zealand dollar is underperforming as the market positions for the worst, following speculation that the RBNZ will provide an interim update on the Central Bank's economic forecasts. An intra-meeting update such as this is more likely a pat on the back, so we should anticipate some type of economic fallout.
This morning’s New Zealand Q2 CPI came in below expectations and the NZD shed some 60 pips, reinforcing speculative market positioning ahead of RBNZ’s hastily called interim economic assessment meeting.