Chips down, Oil up and markets eye RBNZ decision

Aaron Hill FP Markets

Stocks lifted on chip story

US equity benchmarks were green across the board on Monday. The S&P 500 finished just shy of session highs, up 0.7%, while the Dow recorded a second consecutive positive day and refreshed all-time highs above 53,000. Both the Nasdaq Composite and Nasdaq 100 gained more than 1%, with the rally overwhelmingly a chip story – the Philadelphia Semiconductor Index (SOX) closed 2.2% higher.

However, optimism cooled overnight, with regional indices in Asia taking a hit; Japan’s Nikkei 225 lost 2.1%, and South Korea’s KOSPI shed almost 5%, touching the June lows of 7,394, which sit just above the widely watched 7,000 barrier. Markets digested Samsung Electronics’ earnings during the Asian session; they were solid but clearly not enough. I think this was a classic case of ‘buy the rumour, sell the fact’.

Hormuz tensions underpin Oil prices

Tensions in the Middle East have underpinned oil prices this morning amid reports that Iran had attacked tankers in the Strait of Hormuz. Is this the new reality for shipments through this waterway? It is a little surprising that this occurred during the funeral week in Iran for the late supreme leader, Ayatollah Ali Khamenei, and is certainly a reminder of how fragile the ceasefire between the US and Tehran is.

Brent crude and WTI benchmarks are up by more than 1% this morning, with the former trading at US$73.00 per barrel.

JPY: A one-way trade

In the FX space, the JPY continues to circle lows not seen since 1986 versus the USD. The USD/JPY trade remains one-directional, bolstered by carry trade dynamics and the policy gap. However, with intervention risks very much alive and positioning on JPY remaining overstretched to the downside, there is a clear short-squeeze risk here.

Ultimately, volatility in FX is pretty tame right now, and I think it will remain so until tomorrow’s event risk: RBNZ rate decision and the Fed meeting minutes later in the session.

RBNZ decision eyed

We got the US June ISM services PMI report yesterday, which was bang in line with market consensus, with the prices paid index nudging to 67.7 from 71.3 in May. However, it was not much of a market mover.

While the calendar is light today, we do have an update from the RBNZ hitting the wires during the Asia-Pac session tomorrow. Markets are pricing in 19 bps of tightening, or a 76% probability that the central bank increases the Official Cash Rate (OCR) by 25 bps to 2.50%.

Given that the hike is not fully priced in, the decision to raise the OCR will likely be enough to provide an immediate upside jolt to the NZD. However, how far this initial pop travels will depend on what is said. Anything that suggests another hike may not materialise this year (markets are currently pricing in 60 bps of hikes by year-end) will quickly hamper gains. Naturally, if the bank surprises markets by holding the OCR at 2.25%, you can expect a dovish repricing in rate markets and a notable downside move in NZD. Still, I feel this scenario is very unlikely.

Author

Aaron Hill

FP Markets

After completing his Bachelor’s degree in English and Creative Writing in the UK, and subsequently spending a handful of years teaching English as a foreign language teacher around Asia, Aaron was introduced to financial trading,

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