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24 May 2023

24 May 2023

Shake, rattle & roll

• Negative vibes. Little progress on US debt ceiling negotiations, ongoing growth worries, & worrying UK inflation data weighed on risk sentiment.• Stronger USD. The backdrop has boosted the USD. Base metals & equities declined. AUD dipped to ~$0.6540, its lowest level since mid-November.• AUD pressure. Except for AUD/NZD, AUD also underperformed on the crosses. More pressure on the AUD expected, but stats show it is entering rarefied air. Another negative night for markets with little progress on US debt ceiling negotiations, growth worries, and some ‘sticky’ inflation data weighing on risk sentiment. Running through the list, the political impasse...

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24 May 2023

Euro Snapshot

Exhibit 1 Speculators are heavily long euro. Net Long (+) or Short (-) Futures Position Held by Large Speculators, Billions US Dollars Exhibit 2 Europe’s terms of trade shock has almost fully reversed. Citi Terms of Trade Indices, % change from January 3, 2020 Exhibit 3 Economic surprise indices are diverging to a dangerous degree. Bloomberg Economic Surprise Indices Exhibit 4 China’s not riding to the rescue. Annual change in M2 money supply, % Exhibit 5 Inflation is rolling over. All Items, Annual Change, %, SA Exhibit 6 Policy forecasts are coming down. Implied change in policy rate, % Exhibit...

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24 May 2023

Debt ceiling jitters increase

Surprising precisely no one, US politicians appear no closer to resolving the debt ceiling debacle, and evidence of stress is emerging across a range of previously-immune asset classes. One-month Treasury yields are above levels reached ahead of the 2008 global financial crisis, equity markets are down, and the dollar is catching a sustained bid as investors prepare for an 11th-hour deal – or a technical default – that triggers a short-lived worsening in liquidity conditions. Republican House Speaker McCarthy yesterday said “We are not putting anything on the floor that doesn’t spend less than we spent this year,” but is pushing...

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24 May 2023

Cross-Check: AUD/NZD – RBNZ: end of the line

At its May 2023 meeting the RBNZ looks to have delivered its last interest rate hike for this cycle. The 25bp move, which was predicted by most market analysts, takes the Official Cash Rate up to 5.5%, a high since late-2008. And as the chart below shows, following the very abrupt tightening phase which started in NZ in October 2021, interest rates are now well into ‘restrictive’ territory (i.e. above the estimated equilibrium neutral rate). According to the RBNZ rates will need to “remain at a restrictive level for the foreseeable future” to ensure inflation (now 6.7%pa) returns to the...

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