Damage Control

August 07, 2024

Damage Control

  • BOJ tempers expectations of rate rise, after surprising markets with a hawkish hike last month. JPY plunges and the NIKKEI extends yesterday’s rally.
  • New Zealand’s Q2 labor market data beats expectation. NZD outperforms and NZ yields spike up.
  • There are no policy-relevant data releases or scheduled central bank speakers in the US, UK, and Eurozone today.

 

USD is firmer mostly versus JPY and CHF. Cyclical-sensitive currencies are outperforming as global stock markets continue to recover from the recent sell-off.

Nonetheless, the improvement in financial market risk appetite will be shaky in the short-term until we get top-line data (like next Thursday’s US July retail sales report) that shows the US economy is holding up reasonably well and not sliding into recession. Encouragingly, the Atlanta Fed's GDPNow model is now tracking annualized Q3 growth of 2.9%, up from 2.5% on August 1.

Beyond the short-term, the global macro backdrop remains supportive of risk assets. Global growth is steady, inflation pressures are easing, and major central banks have either started or about to start slashing policy interest rates.

USD/JPY surged, and Japanese stocks rallied following dovish comments by Bank of Japan (BOJ) Deputy Governor Shinichi Uchida. Uchida noted the BOJ won’t raise its policy interest rate when the market is unstable and emphasized the need to keep easing firmly for the time being. That's quite the dovish pivot from Uchida who voted with the majority of the Policy Board to raise the key interest rate more than consensus expected on July 31.

The swaps market is now only pricing 15bps of BOJ hikes over the next 12 months, down from 50bps expected right after its July 31 hawkish hike. Looking further out, only 30bps of total tightening is seen over the next 3 years. A more dovish BOJ stance will curb the upward momentum in JPY. The BOJ releases its Summary of Opinions of the July 31 meeting tomorrow.

NZD outperformed and New Zealand bonds underperformed on better-than-expected Q2 New Zealand labor market data. Employment unexpectedly increased 0.4% q/q (consensus: -0.2%, RBNZ forecast: +0.1%) vs. -0.3% in Q1. The unemployment rate rose two ticks to 4.6% (consensus: 4.7%, RBNZ forecast: 4.6%) while the participation rate increased a tick to 71.7% (consensus: 71.3%, RBNZ forecast: 71.5%). Finally, private wages grew 0.9% q/q (consensus: 0.8%, RBNZ forecast: 0.9%) vs. 0.8% in Q1.

The swaps market slashed the probability of a RBNZ rate cut on August 14 to 52% from 90% earlier this week. Our base case remains for the RBNZ to start easing in October with a 25bps cut. Market pricing is more aggressive and implies almost 50bps of cuts by October. We doubt the RBNZ will be as dovish as money market expects because New Zealand non-tradeable CPI inflation remains sticky and business confidence pick-up. As such, NZD/USD has room to edge higher if global financial market risk appetite does not worsen.

USD/CAD is down under 1.3800 in line with the recovery in risk assets. We don’t expect new material information from the Bank of Canada’s (BOC) Summary of Governing Council deliberations later today (6:30pm London). At the July 24 meeting, the BOC slashed the policy rate 25bps to 4.50% but signaled more cuts are in the pipeline. The swaps market is pricing a total of 150bps of BOC easing in the next 12 months which is a headwind for CAD.

China’s July trade data is consistent with sluggish economic activity. Export growth undershot expectations at 7.0% y/y (consensus: +9.5%, prior: 8.6%) while imports rose more than expected at 7.2% y/y (consensus: +3.2%, prior: -2.3%). Overall, China cannot rely on exports to sustain a recovery in economic activity and needs to stimulate domestic demand. Net exports are too small to matter.

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