PBOC says sticking to appropriately loose monetary policy; RBNZ leaves rates unchanged, talks down the NZD again.


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jun. Durable Goods Orders out at -2.5%, ex-transport +1.1% vs. -0.6%/flat expected resp.

  • NZ RBNZ leaves rates unchanged at 2.5%

  • JP Jun. Ind. Prod. out at +2.4% m/m, -23.4% y/y vs. +2.5%/-23.6% expected and +5.7%/-29.5% prior

  • AU Jun. Building Approvals out at +9.3% m/m vs. +6.0% expected and revised -11.0% prior


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • UK Nationwide House Prices (0600)

  • EU ECB’s Weber testifies (0730)

  • GE Unemployment (0800)

  • EU Economic Sentiment Indicators (0900)

  • US Weekly Jobless Claims (1230)

  • CA Industrial Product/Raw Material Prices (1230)

  • US 7-year Note Auction (1700)

Market Comments:

It was another good day for the greenback overnight with a combination of factors hitting investment sentiment and promoting the dollar’s safe-haven status. The initial catalyst came from a late wobble in the China stock market amid fears that official intervention in bank lending would be forthcoming to prevent asset bubbles from forming. The Shanghai exchange wobbled as much as 9% lower but finished down 5%. Secondly, US macro data disappointed with headline durable goods orders falling 2.5% vs. -0.6% expected (although ex-transportation they were up 1.1% and new order capex was up for the second consecutive month) and the Fed’s Beige Book report echoed the more cautious stance adopted by Fed Chairman Bernanke last week.

Further caution was urged by another disappointing US bond auction. The $39 bln of 5-year notes attracted a yield of 2.689%, well above the 2.63% expected and the bid/cover ratio slumped to a poor 1.92, the lowest since September. Watch out for tonight’s 7-year auction for further signs of waning appetite for US debt. The resultant upward pressure on yields saw USDJPY higher and helped the dollar cement its gains.

So, it was a definite “risk off” day with wall St closing in the red and the dollar rebounding some 1.7% from recent lows. EUR slid to its lowest level in two weeks but stopped just short of the psychological 1.40 mark.
Nevertheless, a second day of negativity (Q2 earnings reports seem to have taken a back seat) will likely question the risk appetite corner and it would not be surprising to see further profit-taking/ loss cutting on currency longs if we stay around current levels today.

Commodities were also hit hard by the reversal in risk appetite with oil and copper bearing the brunt of selling. Oil prices slumped to near-on 2-week lows as weekly crude oil stacks data showed a huge build in inventories by 5.15 mln barrels against a decline of 1.5 mln that was expected.

The NZD started the Asian session off on the back foot after the RBNZ kept official rates unchanged at 2.5%. This in itself was as expected, but appeared more vehement in its stance about the strength of the NZD. The implications are that if the NZD does not retreat from current levels then they will be willing to act. Verbal intervention at its best, but most doubt the “action” would have substance. The RBNZ maintained that the rates could go modestly lower but likely more lip service to support its lower NZD desires. NZD slid lower but not excessively so.

Asia looked poised to extend the risk off mood but early comments from the PBOC (some say it was a re-hash of previous comments) that they would “unswervingly” stick to the appropriate loose monetary policy provoked a re-think and we saw early cross JPY and “risk” currency buying. Nevertheless, currency pairs failed to make it back to break-down levels and the Shanghai Composite had slid back into negative territory by lunch. In the end, Asian FX activity remained muted though off from the early lows.

The data releases in Asia had limited impact. Australian building permits were above forecast at +9.3% m/m vs.
+6.0% while Japanese industrial production data was broadly in line with expectations. IP for June rose 2.4% m/m after a 5.7% increase the previous month but the outlook for July looked more positive with an upward revision to 1.6% from 0.9% for manufacturers’ production and a more solid +3.3% for August. Inventories also fell on the month (-1%) with shipments +3.5%.

In today’s session eyes will likely be on European stock markets at the open. They proved the exception yesterday with a positive session, but a switch back into the negative camp will likely increase the chances of another risk off day. At time of writing Asian bourses are mixed, Nikkei and Shanghai marginally in the black, S&P futures also a tad higher. On the data front we will see UK nationwide house prices, German unemployment and EU confidence indicators. Into the US session, there will be Canadian product price indices, US initial jobless claims and not forgetting the 7-year bond auction.