Listen, a lot went on in FX markets overnight. You need only check out the HR homepage to surmise that.
And as we noted in one of the overnight posts, watching it unfold was a rather poignant reminder of just how difficult it’s going to be for everyone to get on the same page when it comes to normalizing policy because, well, because every country has its own economy and so, you’re going to get different signals on growth and inflation.
Throw in the policy uncertainty in Washington which hangs over the dollar like smog on a particularly polluted day in Beijing,and you’ve got a recipe for confusion.
Here to sort through things is SocGen’s Kit Juckes…
Two things need to be said this morning. The first is that while the Australian has rallied further, faster than would seem justified by recent interest rate moves, and indeed further than would seem completely justified by a reading of this morning’s RBA Minutes, it would be wrong to ignore the mood shift in markets. The second is that the dollar is again suffering fairly broadbased sogginess and Treasury yields fail to hold even the middle of their 2017 range. That matters too.
First, the RBA. A pickup in investment, improving labour market conditions, an improving global backdrop, steady FX markets and rising equity indices globally, but subdued wage pressures. An improving economic story but not one to get the heart pumping. A debate about R* that puts neutral rates around 3 ½% at the moment, but does that mean we’re going there soon? The sceptics will be out in force in the days ahead. However, this is just another of those ‘unsurprising surprises’ we’ve been writing about. The world is less in need of triage and intensive care from central bankers than it was, and more of them are thinking about how, and when, to set out on the road to normalisation. Markets, priced for ‘low for ever’, are being forced to rethink too, and after the bank of Canada, now it’s the RBA which is in the spotlight. The upshot? AUD/JPY, AUD/USD and AUD/NZD are all longs we like.
The RBNZ is distanced by soft inflation, the UK MPC faces a fogged-up outlook thanks to Brexit and the BoJ still faces disinflationary pressures. But by the time Mario Draghi gets to Jackson Hole, we’ll be in a lather of anticipation about bond-tapering. The euro, dragged through USD 1.15 by the dollar’s slip yesterday, is on its way towards 1.16 next and on from there. As for the dollar, it is looking tarnished not because there’s anything very negative facing it but because the Fed is no longer alone in tightening monetary policy. The lack of progress on fiscal policy doesn’t help either of course, but the real problem is that range-bound Treasury yields just don’t hack it of yields are going up elsewhere.
Finally two points follow form the nature of the dollar’s sogginess. Firstly, a dollar suffering from relative moves in the policy outlook, rather than home-grown weakness, is not a recipe for EMFX weakness. The carry story remains favourable. And secondly, this is a recipe for a rangebound USD/JPY rather than for a wider capitulation. I’m worried about our USD/JPY forecasts because they depend on higher US yields, but I’m not going to worry about sharp yen strength unless we see a further steady rise in Japanese real yields (probably caused by a collapse in inflation expectations).