By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Independence to Inter-dependence!
As US markets returned from Independence Day holiday, it was inter-dependence that rippled through the markets; and this time, resulting in a “risk off” mood. And the “risk off” mood showed up in classic fashion with;
i) US equities (save for Nasdaq) slipping, snapping a bullish run;
ii) UST (10Y) yields dropping 6-7bps to 1.35-1.36%;
iii) USD rising in defiance of softer yields;
iv) JPY rising (USD/JPY dropping from 111 to below mid-110) despite a broadly stronger USD; and;
v) Oil pulling back >3% (Brent below $75) but gold buoyant.
And to be sure, caution ahead of FOMC Minutes is more an excuse, not a compelling reason.
Instead, a disappointing drop back in US ISM Services, with a drop in activity sub-component, suggests that US’ exceptional recovery is not immune to pockets of global Covid resurgence.
Crucially, it is a reminder that US demand recovery has a high degree of inter-dependence with (rising) oil prices and fading fiscal stimulus; both of which point to deceleration.
A point that echoes in the surprise drop in German factory orders. A closer look suggests autos were impacted negatively by constraints imposed by global chip shortage.
Upshot being, inter-dependence is a feature of the global supply-chain. So necessarily, the divergent global playing out will not be independent of the risks that emerge.
Inter-dependence is also likely to resonate in EM Asia beyond just reflex reaction to US markets.
In particular, China’s on-going regulatory/credit clamp down on the tech and property sectors could also begin to weigh on EM Asia credit/asset markets.
Inter-dependence between oil and global recovery was also revealed in the drop in crude prices in reaction to “risk off” and weak data on both sides of the Atlantic.
Moreover, our misgivings about OPEC+ rift being interpreted as oil boost appears to gained some currency. And oil’s shake-down in the context of “risk off” meant that AUD did not manage to sustained its post-RBA surge (more on that below) to test 0.76; with the Antipodean falling precipitously to sub-0.75 in overnight trades.
RBA’s “State Shift”The interesting thing about yesterday ‘s RBA policy meet was that AUD’s bullish response to 0.76 was staggered as two-part QE calibration and “state-shift” needed to be digested.
To be sure, YCC kept intact and the RBA reinforcing the view that rate hikes were not likely till 2024 provided assurance about policy accommodation. But details of QE and rate guidance reveal a distinct, albeit calibrated, dial back dovish bias.
On QE, once the current (A$5 billion per week) A$100 billion QE program runs out end-Sep, the RBA will reduce both pace and size of (pre-committed) QE.’
Specifically, the RBA will purchase AGBs at a 20% slower pace of A$4 billion per week, and will “only” be pre committed to ~A$24 billion.
Of course, the RBA qualifies that QE may be expanded/extended as required.
On rates, while wage-inflation dynamics do not expect to warrant a rate hike till 2024. RBA chief Lowe stresses that initiating rate hike will depend on “data, not date”.
So, the RBA is being unambiguous about having turned “state-dependent” from “time-dependent”. All said, despite headlines suggesting merely “tweaks” to QE, the reality is that this RBA MPC was more of a “state shift”; with distinct dial back in dovish posturing.
Arguably inadequate to stir AUD bulls out of hibernation. But at the very least, aggressive AUD bears betting on Fed-RBA divergence will be forced to reassess, if not reined in.