Breaking News
LAST CHANCE for Cyber Monday SALE: Up to 54% off InvestingPro! Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

RBA Surprises

By Marc ChandlerForexAug 03, 2021 06:18AM ET
www.investing.com/analysis/rba-surprises-200595676
RBA Surprises
By Marc Chandler   |  Aug 03, 2021 06:18AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

US Treasury yields were slipping, but the weaker than expected manufacturing ISM, which included the slower rise in price paid since March, sent the 10-year yield below 1.15% and the 30-year below 1.83%. The yen appeared to be the most sensitive of the major currencies to US yields, and the drop in yields saw the dollar trade down to JPY109.20 and post its lowest close since early June.

US equities pared early gains, which had lifted the Dow to new record highs before reversing lower, and both the Dow and S&P 500 finished lower. Asia Pacific shares were mixed, with Taiwan, South Korea, and India (Nifty 50 closed at a record high), among the large markets advanced, while Japan, China, and Australia slipped.

Europe's Dow Jones Stoxx 600 was extending its gains into record territory, led by energy and health care. US futures pointed to a higher opening, while US bonds were consolidating, and the 10-year yield was hovering below 1.20%. European bonds were snapping their rally with a 1-2 bp gain today. That said, Greek bonds were extending their advance today, with the 10-year benchmark yield off for the ninth consecutive session.

The Norwegian krone and the Antipodean currencies were leading the move against the dollar, though near midday in Europe, the yen, euro, and Canadian dollar were less than 0.2% changed on the day. Most emerging market currencies were mostly firmer against the dollar.

Gold was consolidating in a narrow band within yesterday's range, stuck between the 200-day moving average (~$1820) and the recent lows ($1805).

Crude oil prices were stabilizing after yesterday's retreat. Near $71.80, WTI for September delivery was about 0.80% higher after dropping 3.6% yesterday, the most in two weeks.

Copper was trading off for the third consecutive session and the fifth in the past six. The CRB Index fell by more than 1% yesterday for the second consecutive session.

Asia Pacific

The Reserve Bank of Australia surprised investors by sticking to its plan to reduce its bond purchases next month. Starting next month, the RBA will buy A$4 bln a week of bonds, down from A$5 bln currently. Governor Lowe argued that once the virus is contained, the economy responds quickly.

The slower pace of bond buying will continue through mid-November before another opportunity to taper opens. The RBA will update its economic forecasts at the end of the week.

Still, Sydney, which accounts for a quarter of the country's GDP and a little more than a fifth of employment, has been in lockdown for the past five weeks and has reported a record number of cases. Lowe was adamant, though, that the conditions that would allow a rate hike are not anticipated until 2024. The market appears to be discounting a hike in 2023.

Tokyo's core CPI, which excludes fresh food, rose to 0.1% in July, its first positive reading since last July. However, the gain seems to reflect higher energy prices, and without fresh food or energy, Tokyo's CPI remained at zero year-over-year. The headline rate actually slipped to minus 0.1% from zero in June, which was the highest since last September. Japan has not escaped deflation, but officials seem to have stopped doing more to turn it around. 

Chinese officials took another swipe today, calling gaming a "spiritual opium," and companies in that ecosystem, including Tencent  (NYSE:TME), fell. Subsequently, the South China Morning Post reported that the reference has been deleted "because its attack against the industry does not represent Beijing's official stance."

Ironically, investors using the "connect" links reportedly bought about $3 bln of Chinese shares in the four sessions through yesterday. On another front, Beijing announced an investigation into the possible price manipulation of makers of semiconductor chips for autos. The State Administration for Market Regulation is focused on prices but also on companies "hoarding" chips.

More than any other single factor, the drop in US yields seemed to explain why the dollar was back near JPY109.00. It has not traded below there since late May. The expiring option at JPY109.25 today, about $330 mln, offered little support. A convincing break of JPY109 targets the JPY108.50 area.

The unexpected decision by the RBA to reduce its bond purchases briefly lifted the Australian dollar above the cap at $0.7400. The aussie stopped a little short of last week's high, near $0.7415, and it has not closed above $0.7400 since mid-July. The 20-day moving average, which it has not closed above since June 10, was found at $0.7400 today. Support was seen in the $0.7350-$0.7360 area.

The Chinese yuan remained in a narrow range today, with a slightly heavier bias. It eased today for the third consecutive session. The price action reinforced the lower end of the dollar's range near CNY6.45. The PBOC set the reference rate at CNY6.4610, near the median projection in the Bloomberg survey (CNY6.4609).

Europe

The US 10-year yield fell by nearly 25 bp last month, the most since Q1 20. The German 10-year yield also fell 25 bp last month to minus 46 bp. The yield has fallen for the last five sessions coming into today, where the yield was about two basis points higher. Germany's 30-year yield fell back below zero for the first time in six months, but with today's gain was ever so slightly positive.

At the short end of the coupon curve, the German two-year yield fell 10 bp in June to minus 77 bp (the US 2-year yield fell by about 6.5 bp to almost 18 bp). It has fallen for the past 12 sessions coming into today, and the streak is at risk. Italy's 10-year yield fell by 20 bp in July and fell another five basis points yesterday at 57 bp, its lowest level since February.

The quest for yield and reduced perceptions of "redenomination risk"  (leaving monetary union) has seen an impressive rally of Greek bonds. Since May, Greece's 10-year yield has traded through (below) Italy. The yield fell by 22 bp in July and started August with a 3.5 bp decline to 56 bp. It was extending its drop for the ninth consecutive session today.

The eurozone's June PPI rose 1.4%, in line with expectations, which lifted the year-over-year rate to 10.2% from 9.6% in May. The acceleration may have taken some of the wind for the bond sails, but it is typically not a market mover. Tomorrow, the eurozone sees the final service and composite PMI readings and the June retail sales report. Growth in the region still appears to be accelerating. 

Two other developments are notable. First, Hungary's finance minister, a moderate, warned that the country, whose relationship with Brussels is strained, could reconsider its EU membership when it becomes a net contributor of funds. The EC is threatening to hold back funds and possibly even fine Hungary for breaking the rules regarding the independence of the judiciary and media and social rights.

Second, Turkey reported an acceleration in July's CPI, which puts the central bank in an awkward position when it meets next week. President Erdogan wants lower rates, but the 1.80% monthly rise in CPI lifted the year-over-year rate to 18.95% (from 17.53% in June). The one-week repo rate stands at 19.00%. A politically pressured rate cut may preserve Governor Kavcioglu's job, but it could spur new lira sales, which feeds through to domestic inflation.

The euro was moving sideways in a narrow range. In fact, the euro remained within the range set last Friday (~$1.1850-$1.1910). There is an option at the lower end of the range for around 840 mln euros that expires today. The market appeared to be waiting for fresh incentives, which do not seem likely to materialize today.

Sterling had approached $1.40 at the end of last week, but it too was not able to sustain the momentum. Instead, it carved out a shelf in the $1.3875-$1.3880 area. It faced an initial cap near yesterday's high, around $1.3935. 

America

News that Republican Senator Graham, one of the ten Republican senators to support the material infrastructure compromise, has contracted COVID, could see a delay in the Senate vote. In any case, the House is not going to take it up until it returns from its recess next month.

Before the recess began, the House failed to extend the moratorium on evictions. Treasury Secretary Yellen will meet with Democrat legislators today to see what can be done to expedite the distribution of the $46.5 bln in federal rental assistance. Most of the funds are not believed to have been distributed, and the bottleneck looks to be at the state and local government levels.

The US reports June factory orders and durable goods orders today, but with Q2 GDP out last week, outside of some knee-jerk headline risk, the market is unlikely to take much notice. July auto sales will be reported through the day. There is risk that auto sales slowed for the third consecutive month. Auto sales peaked in April at 18.51 mln seasonally adjusted annual pace. They fell to 15.36 mln in June, and the median forecast in Bloomberg's survey is for a 15.25 mln unit pace last month. It would be the slowest pace since last August. The slowdown reflects the shortage of supply due to chips and other parts.

Part of the rally in Treasuries may reflect the likely reduction of supply going forward. Yesterday, the Treasury's announced its anticipated borrowing in H2, and it was almost $150 bln less than it projected in May. Plus, the Federal Reserve is buying $240 bln a quarter in Treasury bonds, which is expected to continue through at least the next several months.

Tomorrow, Treasury announces the details of its quarterly refunding. The newest Federal Reserve Governor, Waller, suggested yesterday that a couple more employment reports like the 850k reported in June could get the Fed to begin tapering in October. Moreover, Waller suggests the pace of tapering could be considerably faster than the $10 bln a month seen after the Great Financial Crisis.

Canada sees the July manufacturing PMI today. The recovery peak so far was set in March at 58.5 but fell to 56.5 in June, slipping each month in Q2. Still, the Canadian economy seems to be recovering again, and this should be reflected in today's report.

Canada reports June trade figures on Thursday ahead of the employment report on Friday, where the median forecast (Bloomberg survey) now see 165k jobs growth after a nearly 231k increase in June.

Mexico reported stronger than expected worker remittances yesterday at $4.44 bln, underscoring its importance as a source of capital inflows. The Markit manufacturing PMI remained below the 50 boom/bust level as it has been since last February. The next significant report is the July CPI due next Monday, but barring a significant surprise, Banxico is expected to hike rates when its meets again on Aug. 12.

Yesterday, Brazil reported an uptick in its manufacturing PMI (56.7 vs. 56.4) and a smaller than projected July trade surplus as imports rose and exports fell. June industrial production figures are on tap today ahead of tomorrow's central bank meeting that is expected to result in a 100 bp hike in the Selic rate (to 5.25%). 

The Canadian dollar was slipping for the third consecutive session. The greenback found support at the end of last week near CAD1.2420 and tested the CAD1.2525 area in late Asian turnover. Several expiring option strikes today included about $310 mln at CAD1.2505 and almost $470 mln at CAD1.2540. The big one, for $1.28 bln, is struck at CAD1.2480.

Meanwhile, the greenback remained confined to the recent range against the Mexican peso of roughly MXN19.80 and MXN19.94. The intraday momentum indicators seemed to pave a probe higher in North America today after the dollar's found bids in the European morning near MXN19.83.

RBA Surprises
 

Related Articles

ING Economic and Financial Analysis
FX Daily: A Black Black Friday By ING Economic and Financial Analysis - Nov 28, 2021

Market sentiment has been hit by the news that a new COVID variant was spreading in Southern Africa. While we await more information on the new strain, the oversold JPY was getting...

RBA Surprises

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email