The RBA left rates on hold
And sounded quite dovish, all told
Meanwhile in Brazil
Old Lula is ill
With something much worse than a cold
In Syria, things are a mess
In Taipei they’re feeling some stress
With all this unfolding
It’s no shock beholding
Risk assets just won’t evanesce
Risk is the topic du jour as pretty much everywhere one looks around the world, things are afoot that can inculcate fear (and loathing) rather than embrace those animal spirits. Perhaps the least frightful, but most directly impactful regarding markets, was the RBA meeting last night at which the committee left rates on hold, as universally expected, but appeared to turn (finally) to the dovish side of the ledger. The policy statement explained, “Some of the upside risks to inflation appear to have eased and while the level of aggregate demand still appears to be above the economy’s supply capacity, that gap continues to close. The board is gaining some confidence that inflation is moving sustainably toward target.” However, the proof is in the pudding and a quick look at the AUD (-0.7%) shows that the market has come to believe the RBA is finally joining the central bank rate cutting party.
Source: tradingeconomics.com
The trend seems pretty clear and it is hard to make a case for a reversal absent a massive spike in inflation Down Under forcing the RBA to change direction or something coming from the US focusing on weakening the USD, but given nothing like that seems likely until Mr Trump is officially in office, I am concerned that the Aussie dog will live up to its nickname and make new lows going forward, perhaps testing 0.6000 before this is over.
Speaking of currencies under pressure, elsewhere in the Southern Hemisphere we find the Brazilian real which has fallen to new historic lows, with the dollar now trading above 6.08. For those of you who hate to pay away the points in USDBRL to hedge your balance sheet assets, the reason that you need to do it is very evident from the chart below.
Source: tradingeconomics.com
While there were several short-term dips in the dollar during the past year, the spot rate (at which you remeasure your balance sheet each month) moved from 4.92 to 6.08 in 12 months, nearly a 24% decline in the real. A one-year forward would have cost far less, something like 40-45 big figures, or less than half the actual move, and would have given you certainty as to the cost. Hedging matters!
Now, why, you may ask is this happening? Well, news that Brazilian president Lula da Silva had emergency brain surgery has clearly not helped the currency. Suddenly there are many questions over who is running the country and how they will address the ongoing fiscal issues that are extant. As an aside, this is likely another deterrent to the idea of a BRICS currency appearing any time soon, if ever.
Turning our gaze elsewhere, the situation in Syria continues to unfold with no clear outcome although increased concerns over what will happen with the beleaguered people of that nation and whether it will foment yet another immigration wave into Europe and elsewhere in the Middle East. However, right now, the oil market remains nonplussed over this issue as evidenced by yet another day of quiet trading and a slow drift lower in the price (-0.55%).
However, we cannot ignore Taiwan, where China is currently in the process of military maneuvers that appear to be simulating a naval blockade of the nation. Price action here has shown the TWD (-0.4%) sliding further and pushing back toward its weakest level in more than 15 years (since the GFC), while the TAIEX stock index (-0.65%) is also feeling a little heat, although the story there has been one of consistent gains over the past several years, following the NASDAQ higher given the breadth of technology companies there, notably TSMC.
Putting it all together leaves one wanting with respect to their risk appetite this morning as today seems like another step closer to that Fourth Turning. So, it should be no surprise that after a down day yesterday in the US, with all three major equity indices declining, we have seen far more red than green on the screens overnight. The exception to this rule was in Korea, where the KOSPI (+2.4%) rose sharply as it appears that things are starting to revert to more normalcy there politically. President Yoon is under pressure to resign and seems likely to be impeached and the government is back to functioning in more of its ordinary manner. But elsewhere in Asia, Hong Kong (-0.5%), Australia (-0.5%) and most of the smaller regional bourses were lower although the Nikkei (+0.5%) rallied on the back of the yen’s renewed weakness, and mainland Chinese shares (+0.7%) seemed to begin to believe that more stimulus is, in fact, on its way. We shall see about that.
In Europe, the bourses range from flat (DAX, IBEX) to down CAC (-0.5%), FTSE 100 (-0.5%) with both these nations suffering from their own political distress. French President Macron is trying to form a government but categorically refuses to include Marine Le Pen’s RN party so has no chance of a majority with concerns growing over the fiscal situation there. Apparently, if they cannot get a financing bill passed, the French will get to experience the heretofore unique American experience of a government shutdown. Meanwhile, PM Starmer is watching his ratings circle the drain as his government continues to try to raise revenues by raising taxes on the rich and finding out that one thing rich people are really good at is creating new methods of operations to avoid paying higher taxes. While there is no vote necessary in the UK for years (remember, Starmer won election just this past July 4th) it certainly feels like his government is going to fall sooner rather than later. Meanwhile, US futures are little changed at this hour (7:30).
In the bond market, yields are rebounding with Treasuries higher by 3bps this morning after a 3bp rally yesterday. In Europe, there is very little change except for UK Gilts (+4bps) with concerns over inflation rising there while in Asia, Australian yields slipped 6bps on the dovish RBA. Generally speaking, the bond market has not been very exciting lately which is one reason, I believe, that things have not fallen apart. If we start to see more volatility here, watch out.
In the commodity markets, aside from oil’s modest decline, gold (+0.65%) continues to find support in this risk-off scenario although both copper and silver are little changed this morning after solid rallies yesterday.
Finally, the dollar is higher again this morning, with the DXY well back above 106.00 and every G10 currency declining led by NZD (-1.0%). This is suffering from the RBA’s dovishness which is expected to allow the RBNZ to maintain, or even increase, its own dovishness. But the whole bloc is softer. In the EMG bloc, there are a few currencies that are holding their own vs. the dollar this morning, but only just, with MXN (+0.2%) arguably the strongest currency around while CNY (+0.1%) is also relatively strong. But elsewhere in this bloc, ZAR (-0.7%), PLN (-0.55%), and CLP (-0.4%) are indicative of the type of price action we are seeing across the board. This is a dollar day, though, not really focusing on individual currency foibles.
On the data front, we see only Nonfarm Productivity (exp 2.2%) and Unit Labor Costs (1.5%) and that is really it. There was nothing yesterday and all eyes are truthfully turned toward tomorrow’s CPI data. Things don’t feel very positive right now, so I expect risk to remain on its back foot to start the day. However, given the number of uncertain situations that abound, anything can happen to either change that view or reinforce it. Once again, this is why you hedge, to mitigate the markets’ inherent volatility.
Good luck
Adf
fxpoetry 