RBNZ joins queue, as yuan advance continues

Overview: Lower US rates and ECB doves pushing back the need to cut bond purchases next month saw European bond yields dissipate most of this month’s gain. The inability of US stocks to hold onto their anticipated gains yesterday did not deter Asia-Pacific and European stocks from trading higher. Only the Australian and South Korean markets did not participate today in the fifth consecutive increase of the MSCI Asia Pacific index. The European Dow Jones Stoxx 600 also ends higher for the fifth session. Future US indices are hovering around 0.25%. The US 10-year is holding around 1.56% while European yields are 2-4 bps lower, and in the Netherlands 10-year yields have returned to negative territory. The Reserve Bank of New Zealand was more explicitly hawkish than expected, and its 10-year bond yield jumped eight basis points and pushed the currency up 1% +. While it appears to be helping the Australian dollar rise, the greenback is generally stable to a little firmer against major currencies. Emerging market currencies are mixed. Freely accessible currencies, notably South Africa, Turkey and Mexico, are firmer, but Eastern European currencies, the Czech Republic, Poland and Hungary, lead on the downside. The combination leaves little change to the JP Morgan Emerging Market Currency Index. With little protest, the Chinese yuan is trading at new highs in three years. As industrial commodities like iron ore and steel rebar are trading lower, gold has surpassed $ 1,900 for the first time since January. He only recorded losses in three sessions this month. July WTI is in a tight range, hovering around $ 66 and trying to extend its lead for the fourth straight session.

Asia Pacific

The Reserve Bank of New Zealand has joined the signal from central banks in signaling their intention to adjust monetary policy as the crisis eases. While leaving policy in abeyance, including its bond purchases, its cash rate projections suggest a hike in H2 22. It has released its first official cash rate forecast since the outbreak of the pandemic. But, of course, he framed his outlook by noting that it depends on the data. The market quickly went up in price in two hikes over the next year. New Zealand also reported a strong trade surplus (~ NZD 388 million, the largest since last July), and Fonterra, the world’s largest exporter of dairy products, forecasts high milk prices. The Australian dollar was dragged higher by the surging New Zealand dollar, as some suspect the RBNZ move increases the chances of the RBA signaling an adjustment in July, with the possibility that preparatory work will be laid during the meeting next week.

China has acted on two fronts. First, to contain commodity prices, the Shanghai Futures Exchange is committed to making gains on commodities. Closer examination of participants may have the desired cooling effect. The banking regulator is also pressuring lenders to stop selling financial products linked to commodity futures to retail investors. China’s Banking and Insurance Regulatory Commission wants banks to liquidate existing positions. Second, the local government of Inner Mongolia, which is home to around 8% of global Bitcoin mining, yesterday announced eight measures to crack down on cryptocurrency mining activities.

The rhetoric that the BPC may have protested the rising yuan by ordering state-owned banks to sell yesterday appears to have been undermined by today’s decision. The PBOC set the benchmark dollar rate at CNY 6.4101, closely around the Bloomberg survey’s median forecast of CNY 6.4101. The seemingly neutral solution spurred buying of the yuan. As a result, the dollar fell to almost CNY 6.39, its lowest level since 2018. Today’s 0.25% advance pushes the yuan mora up just over 2% for the year. Meanwhile, the dollar is not going anywhere against the Japanese yen. It is in a range of 20 pips yesterday to just over half a yen. The greenback continues to trade within the range established last Wednesday (~ JPY108.55-JPY109.35). The Australian dollar stalled ahead of $ 0.7800. Although it closed above earlier this month, it has offered resistance since mid-May. Support is seen in the $ 0.7740 to $ 0.7750 area, where A $ 1.2 billion options expire today. The New Zealand dollar rose above $ 0.7300 to set a new three-month high. He remains firm, but Europe has not been able to prolong the movement. Initial intraday support is expected to break above $ 0.7280.

Europe

As several ECB officials pushed against the idea that bond purchases would slow down next month, Hungary’s central bank confirmed last week’s signal from Deputy Governor Virag, who hinted that rates could increase from next month. The April CPI was at a nine-year high of 5.1%, the EU’s fastest and well above the central bank’s 2% to 4% tolerance range. The market appears to be forecasting around 50bp increases for the rest of the year. The market also seems to be taking into account rate hikes from Poland and the Czech Republic in the second half of the year. Investors are giving high-income countries more leeway to accept short-term price pressures. It’s a different story for emerging markets.

Cummings, the former senior adviser to British Prime Minister Johnson, is widely expected to make embarrassing revelations about the chaos and mistakes of the start of the pandemic.. It may make the tabloids exciting to read, but with an economy on track for a full reopening on June 21 and accelerating growth, it may not have much of an impact on the market. Moreover, local elections earlier this month show that the Labor Party is still in disarray.

After hitting a four-month high near $ 1.2265 yesterday, the euro is now consolidating in a narrow range. It holds above $ 1.2230. Yesterday’s low was just below $ 1.2215. A pause would be notable, but the market does not appear to have given up on efforts to push it up. The British pound is also trading in yesterday’s range and is in a range of around 40 pips against the greenback. Support was found over the last two sessions in the $ 1.4110 – $ 1.4115 area. Yesterday’s push above $ 1.4200 has been pushed back. It traded above $ 1.4200 in three separate sessions over the past week and a half and failed to close above.

America

Here is an element of the new normal. Demand for the Federal Reserve’s unprofitable overnight repo facility soared to $ 433 billion yesterday, more than 10% from Monday. These types of levels were previously associated only with extreme end-of-quarter periods. They are now daily occurrences, and moreover, they are likely to develop. So where is all this demand coming from? As usual, the extremes are often overdetermined, which is the opposite of mono-causal explanations. One of the strengths is the Fed’s continued purchases of $ 120 billion per month of long-term securities. Another force is the Treasury’s reduction in its cash balances with the Fed. A third force is aid to states and local governments. Some observers predict that the use of the reverse repurchase facility could approach $ 1 trillion by the end of the quarter.

Federal Reserve Vice Chairman Clarida said the Federal Reserve could perhaps start discussing the cut at future meetings. The market yawned. Specifically, the 10-year yield has fallen to new lows (below 1.56%) since the shocking failure on the April non-farm payrolls on May 7. ) expect an old tapering announcement in the second half of the year, with Q4 clearly the favorite. Even the acknowledgment by San Francisco Fed Chairman Daly that the Fed was talking about cutting back was clear in the FOMC account and in her colleague’s subsequent comments. The Bank of Canada and the Bank of England, both of which have reduced the pace of their bonds, have not been as spectacular or as attractive. Of course, the role of the dollar and the Fed is different, but the market did not go from lowering to raising rates, as some feared. The spread between the implied yield of next month’s Eurodollar futures and the December 2022 contract has narrowed to less than 25bp, suggesting that a rate hike at the end of next year that had been more than fully updated is no longer considered such a sure thing.

North American business newspaper is light today. Mortgage applications in the United States and the latest look at Mexico’s first-quarter GDP (which would have done better than initially announced 0.4% growth) are unlikely to move the market. The Fed’s Quarles speak twice today, but his views are known. The US Treasury sells $ 26 billion two-year floating rate bonds and $ 61 billion five-year bonds. Yesterday’s two-year ticket auction was well received. A lower rate was associated with higher bid coverage. Tomorrow’s sale of $ 62 billion in seven-year notes could be the most difficult auction.

The US dollar remains trapped near its four-year low against the Canadian dollar, but has stopped falling. In fact, so far this week it has stayed in the pre-weekend range: around CAD 1.2025 to CAD 1.2095. A move above CAD1.2100 signals a test on last week’s high and 20-day moving average (~ CAD1.2145). The greenback had not traded above the 20-day moving average since April 21, when the Bank of Canada announced cuts to its bond purchases and postponed to the second half of next week when the economic slowdown would be absorbed. The milder US rates haven’t helped the Mexican peso as much as it once seemed. The dollar continues to fall between MXN19.80 and MXN20.00. Minutes from earlier this month’s meeting are due tomorrow, and they should show that the accommodating position has been abandoned. President AMLO has already clarified that Governor Diaz de Leon’s term expiring at the end of the year will not be renewed.


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