Rate Hike Conundrum
National central banks were the key drivers for three members of the British Commonwealth last week – New Zealand, England, and Canada. For all three countries, the price action in their respective currencies revolved around one question – when will the central bank raise interest rates?
The New Zealand dollar suffered an absolute drubbing last week as it lost nearly 2% on its way to making fresh 2-year lows. The drop was caused by the dovish outlook by the Reserve Bank of New Zealand. The RBNZ signaled that the interest rates will remain at record lows for "some time to come", while also flagging growing risks to both domestic and global economies. The RBNZ is worried that President Donald Trump's push to reduce the US trade deficit, especially with New Zealand’s biggest trading partner China, will reduce China’s demand for New Zealand exports. The overnight-index-swaps markets are not pricing in a rate hike until March 2019, and even then the market is suggesting a little more than a 20% probability the RBNZ will have raised interest rates by then. This will not lend any type of support for the kiwi.
Moving on to the GBP, it received a boost last Thursday when Bank of England Chief Economist Andy Haldane said his unexpected vote to raise interest rates this month should not be considered “surprising or radical”, especially after a decade of ultra-loose monetary policy. The previous week, Mr. Market was taken back when Haldane changed the near-term dynamics of a BOE rate hike by joining two other members of the bank’s Monetary Policy Committee voting for an immediate rise in rates, boosting the chances of an increase in August.
If you recall, in mid-April, the GBP had just hit its highest level since the Brexit vote as Mr. Market was priming for a May interest rate hike. Then BOE Governor Carney hinted at some soft spots in the economy in an interview with the news media. Add in a series of misses on the economic data front and the GBP went from 1.44 to 1.30. Shortly after it hit that low, which was the worst level since November, Haldane said they would have hiked in May if not for the poor data.
Even though the Haldane induced bounce was not enough to avoid the third consecutive weekly loss, the technical indicators are starting to turn up. Will this be enough to turn the GBP? Time will tell but it will need some help from Brexit concerns.
I try not to give a lot of airplay to words spoken by central bank officials but I did like this gem: Haldane said in his speech there would always be some data that disappoints. “But waiting for something to turn up is not a prudent strategy in life. And waiting for everything to turn up is certainly not a prudent strategy for monetary policy.” - Words of wisdom indeed.
Lately, but certainly not least, the star of the week was the performance of the CAD. The CAD sagged by over a cent on Wednesday during a speech to the Chamber of Commerce in Victoria by Bank of Canada Governor Stephen Poloz. Ironically, in his speech Poloz promised transparency but in reality Mr. Market was left scratching his head - there were clear statements hinting Poloz would hold off on raising rates and there were other statements that seemed to hint he would hike as planned. This degree of transparency, or lack thereof, left Mr. Market with a dovish take so he marked down the currency.
In the press conference after the speech, Poloz walked Mr. Market back into a more hawkish tint. “We’ve said clearly that, given where the economy is, we’re in a situation where the economy will warrant higher interest rates,” Poloz told reporters after a speech. Poloz went on to say that the economic “big picture” supports a withdrawal of stimulus given interest rates remain at historically low levels. He also stressed that the BOC isn’t likely to be derailed by “single-data points,” referring to a string of disappointing economic numbers in recent weeks, or heightened trade uncertainty whose actual impact remains unknown.
The overnight swaps market is now pricing in an 87% probability of a Bank of Canada rate hike on July 11th, up from 53% prior to Poloz’s speech. BOE has Brexit to worry about and the BOC has NAFTA to worry about but in both cases these two issues should not impede each bank’s next move. Having said that, Mr. Market is gaining conviction that the BOC will be next major central bank to hike interest rates.
Interestingly, the CAD hasn’t benefited from the surge in the price of oil in the last couple of weeks but that may change going forward. The price of oil has surged by about 15% over the last two weeks, hitting its strongest level since November 2014. This latest price surge has been underpinned by US threats to cut off Iran’s oil exports and a surprising 9.9 million barrel drawdown in oil inventories (the biggest drop of the year). At this pace, it may challenge overhead resistance at the 2011 and 2012 lows between the $76 to $77 price zones.
On Saturday morning, President Trump decided he had enough with surging oil prices and took to twitter:
“Fake News”, apparently - In a statement issued by the White House late on Saturday, it said that the White House said that the Saudi king had promised President Donald Trump that he can raise oil production if needed and the country has 2 million barrels per day of spare capacity. So just to clarify, Saudi Arabia can raise production by 2 million barrels per day but they have not agreed to do so. In fact, Saudi Arabia along with other Organization of Petroleum Exporting Countries (OPEC) and non-OPEC nations, including Russia, had agreed on June 22 to boost production by a combined 700,000 to 1 million barrels a day.
Key Data Releases This Week
|MONDAY, JULY 2|
|10:00||USD||ISM Manufacturing PMI||58.2||58.7|
|TUESDAY, JULY 3|
|12:30||AUD||RBA Rate Statement|
|21:30||AUD||Retail sales m/m||0.3%||0.4%|
|WEDNESDAY, JULY 4|
|THURSDAY, JULY 5|
|06:00||GBP||BOE Gov Carney Speaks|
|08:15||USD||ADP Non-Farm Employment Change||190K||178K|
|10:00||USD||ISM Non-Manufacturing PMI||58.3||58.6|
|11:00||USD||Crude Oil Inventories||-9.9M|
|14:00||USD||FOMC Meeting Minutes|
|FRIDAY, JULY 6|
|USD||Average Hourly Rate m/m||0.3%||0.3%|
|USD||Non-Farm Employment Change||200K||223K|
Senior FX Dealer,
Global Treasury Solutions