·
RBNZ,
PMIs in the spotlight Once again there was a decent amount of news that resulted in
relatively little movement. EUR/USD had the second-smallest range of the year
at 0.14% (lowest was 0.11% on April 18th). The market ignored reports that two
Ukrainian fighter jets were shot down, apparently from the Russian side of the
border, according to the Ukrainian government. Gold was lower despite the news.
The only G10 currencies to weaken notably against the dollar were NZD (see
below) and GBP, which fell yesterday on the dovish implications of the Bank of
England minutes. On the other hand, AUD strengthened after the provisional
HSBC/Market China manufacturing PMI for July rose to 52.0 from 50.7, beating
expectations of 51.0.
·
The Reserve Bank of New Zealand (RBNZ) raised
its official cash rate (OCR) by 25 bps, as was generally
expected, but said it would pause for “a period of assessment before
interest rates adjust further towards a more-neutral level.” In other words it
will continue to hike, but first wants to see how the 100 bps of hikes so far
are affecting the economy. The RBNZ had harsh words to say about its
currency. "Over recent months, export prices for dairy and timber
have fallen, and these will reduce primary sector incomes over the coming year.
With the exchange rate yet to adjust to weakening commodity prices, the level
of the New Zealand dollar is unjustified and unsustainable and there is
potential for a significant fall," the RBNZ said. It’s hard to argue with
their contention that the currency is overvalued; on both CPI and PPI basis
it’s the most overvalued of the G10 currencies (33% and 40% overvalued vs USD,
according to Bloomberg calculations). The OECD’s calculations put it in the
middle of the pack, but even there it’s 21% overvalued, according to their
calculations (the most overvalued on this methodology is CHF at +35%, while the
yen is merely +2% overvalued). In general, currencies do tend to revert back
towards their purchasing power parity (PPP) values, but it can take a long,
long time. So long as
the RBNZ keeps real interest rates the highest among the G10 (indeed, is the
only central bank with a positive real official rate), NZD should be well
supported.
The Reserve Bank of New Zealand (RBNZ) raised
its official cash rate (OCR) by 25 bps, as was generally
expected, but said it would pause for “a period of assessment before
interest rates adjust further towards a more-neutral level.” In other words it
will continue to hike, but first wants to see how the 100 bps of hikes so far
are affecting the economy. The RBNZ had harsh words to say about its
currency. "Over recent months, export prices for dairy and timber
have fallen, and these will reduce primary sector incomes over the coming year.
With the exchange rate yet to adjust to weakening commodity prices, the level
of the New Zealand dollar is unjustified and unsustainable and there is
potential for a significant fall," the RBNZ said. It’s hard to argue with
their contention that the currency is overvalued; on both CPI and PPI basis
it’s the most overvalued of the G10 currencies (33% and 40% overvalued vs USD,
according to Bloomberg calculations). The OECD’s calculations put it in the
middle of the pack, but even there it’s 21% overvalued, according to their
calculations (the most overvalued on this methodology is CHF at +35%, while the
yen is merely +2% overvalued). In general, currencies do tend to revert back
towards their purchasing power parity (PPP) values, but it can take a long,
long time. So long as
the RBNZ keeps real interest rates the highest among the G10 (indeed, is the
only central bank with a positive real official rate), NZD should be well
supported.
·
Japan’s trade balance continued to worsen. The deficit for June was JPY 1.08tn (SA), vs
JPY 862bn (SA) in June. Although this was better than market estimates, the NSA
figure for the trade balance was worse, giving a mixed picture. The problem was
exports, which fell 2.0% yoy instead of rising 1.0% as expected, while imports
were in line with estimates at +8.4% yoy. Japan’s exports are not benefitting
from the weaker yen, while of course import prices have risen in line with the
drop in the currency. This could be the fatal flaw in Abenomics:
the weaker yen winds up reducing aggregate demand by reducing households’
purchasing power without boosting exports, thus causing further deflation! The
Japan manufacturing PMI fell to 50.8 from 51.5. I remain bearish on the yen, although
it’s hard to say what will be the catalyst to push it out of its recent range.
Japan’s trade balance continued to worsen. The deficit for June was JPY 1.08tn (SA), vs
JPY 862bn (SA) in June. Although this was better than market estimates, the NSA
figure for the trade balance was worse, giving a mixed picture. The problem was
exports, which fell 2.0% yoy instead of rising 1.0% as expected, while imports
were in line with estimates at +8.4% yoy. Japan’s exports are not benefitting
from the weaker yen, while of course import prices have risen in line with the
drop in the currency. This could be the fatal flaw in Abenomics:
the weaker yen winds up reducing aggregate demand by reducing households’
purchasing power without boosting exports, thus causing further deflation! The
Japan manufacturing PMI fell to 50.8 from 51.5. I remain bearish on the yen, although
it’s hard to say what will be the catalyst to push it out of its recent range.
·
Today: The PMIs will take center stage
during the European day. Eurozone’s preliminary PMIs for July will be released
just after the two largest countries of the bloc, Germany and France, release
their figures for the same month. Both the manufacturing and service sector
PMIs for the Eurozone are expected to decline slightly, reflecting the overall
slowdown in growth and economic turbulence in the region. That could add to the
sense that the Eurozone’s only hope is a weaker currency and push EUR down
slightly.
·
Sweden’s
official unemployment rate
for June is coming out and the forecast is for the rate to increase to 9.0%
from 8.0%, consistent with the increase in the Public Employment Service (PES)
unemployment rate earlier this month. The weaker labor data will most likely
offset the recent promising rise in the CPI --following the shock in the
unexpected official rate cut by Riksbank— of a moderate rebound in the Swedish
economy and could be negative for SEK.
·
In
the UK, retail sales excluding gasoline
are expected to rise 0.3% mom, a turnaround from -0.5% mom in the previous
month. That should be positive for the pound.
Later
in the day, we get the US preliminary Markit manufacturing PMI for July
(expected to rise) and new home sales for June (expected to fall). The
initial jobless claims for the week ended 19th of July are forecast to rise
marginally.
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