I wanted to wait to see the non-farm payrolls (NFP) on Friday before making further comments on USD direction. The payrolls always give you time to pause and reassess by either buying dips or selling strength if you have one a certain conviction or if the conviction is low it gives momentum direction.
Currently, US markets give me conviction and that is strong and despite the headline drop of 157,000 jobs added in the month of July which was 40,000 jobs below consensus, June and May were rapidly revised up the meaning on a 3-month blended view US employment is as rosy as ever. Even more, telling was the unemployment rate, underutilization rates and average hourly earnings all back at May levels which in some cases is the strongest readings since the end of the second world war.
The USD remains, in my view, a long call over the medium term, and this was confirmed by the Fed last week.
On central banks, the Bank of Japan, as expected, is stuck in a loop of its own making, as I suggested last week ignore the noise that the BoJ is looking to structurally alter or tweak its programs to make them more ‘sustainable’. It may want this scenario, in reality, the action needed is to far a move for the bank – nothing to see here.
The Bank of England did, as expected by all, hike rates for the second time in the post-Brexit era, yet the board did state it was unsure of how Brexit would play out and that its forward horizons of GDP and CPI were ‘around 1.75%’ and ‘around 2%’ respectively. That is a very dovish view of its domestic world yet its hiking rates. The RBA has a view that GDP will be ‘around 3%’ and CPI will be ‘touching 2%’ come 2020 yet is welded to the ‘neutral’ fence. The interesting one is the BoE.
The Fed, in my view, locked in September and December as hike months in its statement last week, GDP wording went from ‘solid’ to ‘strong’ and inflation is ‘at or above’ the Board’s consensus. Conclusion: The next 6 rate hikes are coming at one a quarter starting in September. Its why I am bullish the USD.
This brings me to what will happen this week, for the for the 22nd consecutive month the RBA will hold rates steady and its status quo will be maintained now and into the very distant future as the market is pricing in a further 22 months before the chance of a rate hike.
The Board is in a vacuum compared to global peers (barring the BoJ and ECB). I actually believe the board is in the right to be holding the cash rate at the current level, however, there was an interesting few things from the from the BoE statement I think is worth pointing out:
In the MPC’s central forecast, conditioned on the gently rising path of Bank Rate implied by current market yields, GDP is expected to grow by around 1¾% per year on average over the forecast period. Global demand grows above its estimated potential rate and financial conditions remain accommodative, although both are somewhat less supportive of UK activity over the forecast period. Net trade and business investment continue to support UK activity, while consumption grows in line with the subdued pace of real incomes.
Although modest by historical standards, the projected pace of GDP growth over the forecast is slightly faster than the diminished rate of supply growth.
Basically its saying we will never find the ‘perfect scenario’ to raise rates so we are doing something rather than nothing. Could the RBA ever do this? It’s possible but unlikely why?
1. Inflationary pressure remain elusive unlike the UK which has seen inflation rising
2. The Australian housing market has significantly cooled over the past 18 months meaning the RBA’s need to ‘push against the tide’ has receded.
Take these point together and the RBA’s and market pricing is perfectly rational and most likely correct. Tomorrow’s statement will likely confirm this theory and means the AUD will be at the downside mercy of which ever pair it is facing. A trade that is now firmly underway when you look at the AUD again the EUR, GBP, JPY and USD.