Foreign central banks’ surprise with big cuts in benchmark interest rates
Scott Petruska, CFA " | August 7, 2019
Foreign central banks are cutting interest rates in anticipation of slowing global economic growth and trade. The Reserve Bank of New Zealand cut by 50 basis points, Thailand by 25 bps and India by 35 bps. Investors continue to watch the daily USDCNY fix by the People's Bank of China for clues about China’s next move in the US-China trade war and in a currency war that is heating up. The dollar is higher but it is the safe havens that are in great demand – bonds, gold and the Japanese yen.
August 7, 2019
EUR/USD 1.1224 GBP/USD 1.2150 USD/CAD 1.3327 AUD/USD 0.6735 USD/JPY 105.77 USD/CNH 7.0925 USD/ILS 3.4784 USD/MXN 19.6844 USD/CHF 0.9721 USD/INR 70.8887
The dollar index is steady, but advances by the yen against the dollar were offset by weakness in the Australian and New Zealand dollars. Other currencies remained in relatively tight trading ranges. Early signs of a currency war are making traders nervous, as market chatter grows about potential (but not probable) intervention by the US Treasury to weaken the dollar.GBP
The pound remains soft, but within a recent 1.21-1.22 trading range. Investors must wait until September when parliament returns from vacation for a no-confidence vote in PM Boris Johnson. He is sticking to his no-deal Brexit unless the EU changes their stance, and they have no incentive to do so at this time.EURThe euro erased early losses and now trades close to yesterday’s close. German industrial production fell by more than expected in June, fueling fears that Europe’s largest economy could be approaching its first recession in more than six years. German 10-year bund yields dropped further to -0.60%.CAD
The loonie weakened further overnight. The USDCAD currently trades above C$1.33, the highest level since June. Canadian markets were on holiday on Monday, so traders are playing catch-up to some extent. Canadian bond yields dropped to 1.13%, the lowest level in nearly three years. Expectations are growing for a rate cut by the Bank of Canada in December.ASIA/PACIFIC
The USDCNY is trading slightly higher overnight. The offshore USDCNH continues to trade much higher than USDCNY, indicating that traders have high expectations of a weaker RMB going forward.
The Reserve Bank of New Zealand was expected to cut its benchmark interest rate, but not by 50 bps. The new rate is 1.00%. The New Zealand dollar plunged to five-year lows, as the RBNZ gave no indication they were finished easing. The Australian dollar fell in sympathy, as traders expect the Reserve Bank of Australia to continue easing its monetary policy as well.
The Japanese yen continued to gain against the dollar overnight, as safe haven buying remains strong. Currently trading near ¥105.70, the previous low in March 2018 was 104.74.