RBNZ set for lift-off

New Zealand Unemployment outperforms

New Zealand Unemployment dropped to 4.0% for Q2 this morning, a stunning result given that market expectations were 4.50%. That should be the green light for the RBNZ to hike by 0.25% on August 18th, with all four major New Zealand banks predicting three rate hikes in total for the rest of the year. New Zealand will join a very small group on the normalising path, and at this stage, only the arrival of the delta-variant Covid-19 in the community would derail that outlook. Predictably, the New Zealand dollar has rallied 0.50% versus the US dollar and is higher versus the yen and Australian dollar, etc. I expect the kiwi to outperform going forward.

Yesterday the Reserve Bank of Australia sprung a surprise, refusing to blink in the face of the delta variant popping up far and wide across Australia (it arrived in Cairns yesterday) and staying on its tapering track. That has limited the fallout in the Australian dollar, although if the lucky country is still in the same place at the end of September, as it is today, those forecasts may have to change.

Today also sees the latest Bank of Thailand policy decision with Thailand in a very different place to the lands down-under. With the economy wilting under the delta-variant onslaught and inflation very near the bottom of the BoT’s 1.0%-3.0% range, rates should remain at the 0.50% record lows. The BoT has precious little wiggle room on the monetary policy front, which is likely to be ineffective anyway, with fiscal policy required for the heavy lifting. The Thai baht remains near 17-month lows and will remain a leading member of my Asian fragile four.

On that note, another member, the Indonesian rupiah, has rallied impressively over the last few days. USD/IDR falling from near 14,600.00 to 14,300.00 this morning as Covid-19 cases fell. But don’t be fooled; cases have moved lower in step with rapidly falling testing, while deaths have remained consistent at around 1500 per day. Cases shot up yesterday as, you guessed it, testing increased. Indonesia has firm commodity prices and a modest recovery in domestic demand to fall back on, making its outlook better than Thailand’s. Any rally by the Indonesia rupiah is one to sell into until Indonesia starts winning its virus battle.

Over in China, the spiritual opium comments regarding online gaming sparked a panic sell-off in the likes of Tencent yesterday. Clearly, the financial markets definition of what it thinks the Chinese government considers targeted clampdowns and the government’s actual definition remain poles apart. China popped in an inquiry into automotive semiconductors into the mix yesterday as well, as the hunt for commodity hoarders goes on. The buy-the-dip herd continues to confuse optimism with reality. The regulatory discount on China equities versus being so cheap now it doesn’t matter still has some way to go.

On the subject of China, readers should monitor the Covid-19 situation there. Today’s Caixin Services PMI outperformed, signalling that domestic demand continues to improve. However, with albeit small numbers of cases popping up in multiple locations, a rapid deterioration in the situation could lead to some repricing of China growth, with the Manufacturing PMIs already signalling a slowing pace. You wouldn’t bet against the Chinese authorities’ ability to nip the outbreaks in the bud, but more than previous versions, the delta-variant has a whack-a-mole look to it, as Australia et al. have found.

Europe and the US release services and composite PMIs today, but the most attention is likely to be on US ADP Employment and ISM Non-Manufacturing Prices. The ADP data has been a poor indicator for the Non-Farm Payrolls of late, but markets will reprice Non-Farm expectations if the ADP deviates in a significant way from the 700,000 jobs expected. Similarly, the ISM Non-Manufacturing Prices will probably have the inflationistas wringing their hands if it prints well north of last month’s 79.5. Will that shake the bond market out of its lethargy? I doubt it. But a low number will almost certainly see US long-dated yields move lower once again, which could see US dollar selling emerge.

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