The nation that first tried to fix
Its price target’s up to new tricks
Last night it explained
That rates would remain
Unchanged til growth, up, finally ticks
You know it has been a relatively uneventful session when the most interesting story is about New Zealand! For those with a bent toward history, it was then-RBNZ Governor Donald Brash, who in 1988 set the first inflation target for a nation, 3.0% at that time, and who was able to maintain the RBNZ’s independence from government meddling ( a new philosophy then) to help achieve that target and eventually bring interest rates down from more than 15% to low single digits. Well, last night when the RBNZ met, they left rates on hold at a record low level of 1.75%, as was universally expected, but they added a sentence to their policy statement “…that rates will remain at this level through 2019 and into 2020”, adding forward guidance to the mix and surprising markets completely. The result was that the NZD fell a bit more than 1% instantly and has continued lower to currently trade down 1.4% on the session and back to its lowest level since March 2016.
This action simply underscores the policy divergence that we have seen over the past two and a half years. Since the Fed’s first, tentative steps towards tightening in December 2015, it has been clear that the US remains ahead of the global growth cycle. And now we find ourselves in a world where several countries are trending higher (US, Canada, India, Sweden) in growth and inflation, while others are seeing the opposite outcome (China, New Zealand, Australia). Of course there are those who are in between, like the Eurozone and Japan, where they want to believe that things are getting better so they can normalize policy, but just don’t quite have the confidence yet. Maybe soon. And it is these policy differences, as well as expectations for their evolution, that will continue to be the key drivers of currencies going forward.
However, away from New Zealand, the G10 has been a dull affair. There has been limited data released and currency movement has been extremely modest, generally less than 0.1% since yesterday’s closing levels.
Emerging markets, though, have been a different story, with several of them really taking a tumble. Starting with Turkey, which has, of course, been under pressure for the past several months, last night saw yet another significant decline of 2.2%, which makes 6.5% this week and more than 50% in the past year. Additional US sanctions driven by the arrest of a US pastor in Turkey have been the recent catalyst, but the reality is that there is an increasing sense of doom attached to President Erdogan’s economic management theories, which include the idea that high interest rates cause inflation; they don’t fight it. But high inflation is what they have there, with the annual rate now running above 16% and rising. The lira has further to fall, mark my words.
Next on the list is the Russian ruble, which has recovered as I write to only be down by 0.6%, after having been lower by as much as 1.3% earlier in the session. However, this week it is lower by 4.2% and nearly 7% this month. The story here is a combination of both new US sanctions as the latest response to the poisoning of an ex Russian agent in the UK earlier this year, as well as the sharp decline in oil prices yesterday, WTI fell 3.2% after storage data indicated there was much more oil and products around than expected. The Russian economy is definitely feeling the squeeze of US sanctions and I expect that the ruble will continue to be pressured lower for a while yet.
But once we get past those currencies, there is precious little to discuss in this space as well. Which takes us to the upcoming data releases. This morning we see Initial Claims (exp 220K) and PPI (3.4%, 2.8% core) at 8:30 and then we hear from Chicago Fed president Evans at 9:30. Evans is a known dove, so the only possibility of a newsworthy event would be if he sounded hawkish. Yesterday, Richmond Fed president Barkin said it was time to get rates back to ‘normal’ and that two more hikes this year seem reasonable. While the futures market is not yet pricing in great confidence in a December move by the Fed, it seems a foregone conclusion to me.
In the end, nothing has happened to alter my views that the Fed will continue to lead the way in tighter monetary policy and that the dollar will be the main beneficiary of that action.