As Trade Euphoria Fades, Markets Return To Parsing Central Bank Guidance

The global risk-on mood catalyzed by the tentative Sino-US trade truce struck in Osaka faded on Tuesday, after the USTR proposed tariffs on another $4 billion in European goods.

The provocation, tied to a long-running dispute over Airbus subsidies, served as a stark reminder that the world’s largest economy is still in the hands of an administration inclined to promote tariffs “as a kind of miracle cure for all possible issues that involve another country”, to quote SocGen.

The RBA cut rates for the second consecutive meeting and now looks set to stay on hold for at least a little while to see how things pan out. In a subsequent speech, Philip Lowe kept the door open for more cuts “if needed to get us closer to full employment and achieve the inflation target in a way that supports the collective welfare of all Australians.” Obviously, worries about the worsening global manufacturing slump, the prospect of commodities demand destruction tied to global growth jitters and, relatedly, the possibility that the Chinese economy continues to falter in the face of the trade war, continue to weigh on the outlook down under.

Unfortunately, the Aussie actually rose thanks to a change in the statement language. On June 4, the statement said the RBA will “adjust monetary policy to support sustainable growth in the economy and the achievement of the inflation target over time”, while Tuesday’s statement said the Board will “adjust monetary policy if needed“. That might sound trivial to casual observers, but it’s pretty explicit to anybody who’s used to parsing forward guidance. It’s safe to say the explicit nods to further rate cuts in Lowe’s speech were an effort to ensure the market knows the door is still open for more easing despite the “on hold” character of the statement language.

The key point is that when everybody is chasing back down the accommodation rabbit hole at the same time, there’s always a risk you aren’t dovish enough and accidentally prompt FX appreciation with a turn of phrase – that risk is especially acute when smaller economies are attempting to ease alongside larger ones.

“Looking forward, we note the RBA added a slight caveat to its commitment to ‘monitor developments in the labour market and adjust monetary policy if needed’ [and] we interpret this as a slight softening of the near-term easing bias”, Goldman wrote. “Further ahead, however, given the RBA’s ambitious target of a 4.5% unemployment rate over the medium term, we continue to expect additional rates cuts in November and December”.

“Another [RBA] cut is seen by the market as likely in the months ahead but intriguingly, the chances of rates falling twice more are receding in the market’s mind”, SocGen’s Kit Juckes said Tuesday, adding that “the relative Australian/US real yield differential and AUD/USD have moved together more consistently in the post-GFC era than most rate/fx pairs and yields are showing signs of bottoming”.


Meanwhile, in a testament to just how “doved-up” markets really are, the euro jumped on reports that the ECB isn’t “in a rush” to cut rates this month. According to officials (and ECB leaks are always intentional), the GC would rather wait for more data, although a tweak to the statement language tipping imminent easing is possible.

Although you could pretty easily argue that the ECB is just putting off the inevitable (if you know you need to ease, why not do it now?), you’re reminded that with rates still mired in NIRP and options for more QE somewhat constrained, this isn’t quite as easy as just pulling the trigger. The tiering discussion probably hasn’t evolved enough yet and it isn’t likely there’s consensus among policymakers on what or how much to do. Clearly, the new round of TLTROs isn’t “enough”, but what another outright easing package will look like is still up for debate.

So, when you look at the euro and the aussie on Tuesday, note that with a July Fed cut pretty much a foregone conclusion, any hint that the FOMC’s global counterparts aren’t going to keep cutting at every meeting (in the RBA’s case) or rush into a cut (in the ECB’s case) is enough to trigger some FX appreciation.

In any event, this is now just a game of competitive easing, with the FX market serving as the arbiter of the “winners” and the “losers”. For risk assets, the word is “coordinated” not “competitive”, as the bias towards more accommodation bolsters the bull case to the extent it’s predicated on the policy “put”.

That is, of course, unless the proximate cause for the easing bias (a slowing global economy) eventually outweighs the good vibes from accommodation.


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