MNI EXCLUSIVE: Former RBA Economist On The Cash Rate Outlook

As cash bonds set up for another trading day, futures had guided prices marginally lower after the overnight rally in the US.  As TYZ5 trades down -01+ at 113-11 bond yields are opening up marginally lower.  

• The US 2-Yr is at 3.381%, close to 0.5bp lower in early trade.   
• The US 5-Yr is at 3.607% having closed prior to Columbus day at 3.626%.  
• The US 10-Yr is down -0.5bps to 4.028% having failed to test 4.00% prior.   It had looked likely to remain in the 4.00% - 4.20% range for now, seeking a fresh catalyst to break out.  
• The US 30-Yr is down -0.5bps at 4.628%
• The catalyst for the overnight rally was comments from Fed Chairman Powell indicating that the outlook for inflation and employment appears to have changed little since September, keeping intact expectations for two more rate cuts this year.  
• Key data in the calendar for later is Empire Manufacturing which is forecast to decline -1.8 following -8.7 in September and Real Average Hourly Earnings.  

NZDUSD has dipped today to around 0.5709 following comments from RBNZ chief economist Conway and that he’s “confident” the output gap will close and that rates are towards the bottom end of neutral suggesting that further easing will bring policy into stimulatory territory. At this stage another cut on 26 November looks likely.

• Conway reiterated that rates are “getting toward the lower end” of the neutral range. The RBNZ estimates it to be around 2.5-3.5% and the OCR is currently at 2.5% after October’s 50bp cut. He also repeated that excess capacity should help inflation return to the 2% mid-point of the band.
• His speech was on the policy lessons learned from the pandemic period which included recent research on the effect of Large-Scale Asset Purchases (LSAPs). He stated that “while certainly not perfect, LSAPs need to remain a key part of our additional policy toolkit for targeted interventions during financial and economic crisis when the Official Cash Rate has reached its lower limit.” But additional tools are unlikely to be used anytime soon.
• Kiwi was impacted by generally weaker risk appetite on Tuesday related to US-China trade concerns as China retaliated against the US’ investigation into shipping. NZDUSD fell 0.2% to 0.5716 on Tuesday off the intraday low of 0.5683 helped by comments from US trade representative Greer that staff-level talks with China were taking place increasing hopes of a solution.
• AUDNZD is up 0.2% to 0.1365 so far today driven by the contrast between the RBNZ’s clear easing bias and the RBA’s caution and focus on upside risks in its 30 September meeting minutes. AUDNZD fell to 1.1323 on Tuesday and finished down 0.3% to 1.1349.

USD/CNH is wedged between key EMAs, last near 7.1415/20 (the 20-day support point is at 7.1370, while on the topside the 50-day resistance is close to 7.1450). Recent highs in the pair have not stretched much beyond 7.1500. Spot USD/CNY ended yesterday at 7.1372. 

• Firm market focus remains on US-China relations. Sentiment calmed somewhat as Tuesday's session unfolded (after risk off came post China shipping curbs/investigation). With USTR's Greer confirming that staff-level communications between US and Chinese representatives was underway, helping stabilize sentiment. Greer also stated the meeting between US President Trump and China President XI is still scheduled  to take place.
• Still, US President Trump stated, "... he might stop trade in cooking oil with China as retaliation against Beijing for its refusal to buy American soybeans." (via BBG). Chair of the US National Economic Council also stated on FoxNews that the US has lots of leverage over China and that China needs to come to the table to work with the US.
• 1 month implied USD/CNH vol remains near recent highs, last at 3.20%, is still very low by historical standards. The anchored USD/CNY fixing is helping offset concerns from US-China trade tensions.
• Today we get the Sep inflation prints, with CPI expected to remain negative at -0.2%y/y, while PPI is forecast at -2.3y/y (versus -2.9% prior).
• Equity sentiment will also be in focus, with China and Hong Kong markets losing momentum over the past week. The China to global equity ratio has fallen sharply, although this isn't impacting CNH negatively at this stage.