RBA ends year with stable rates, US yield curve inverts

Summary:

• Reserve Bank of Australia kept its interest rates unchanged at its final meeting this year

• Oil keeps climbing, US dollar stutters and equities mixed

• US Treasury yield curve inverts (at one section) for the first time in more than a decade

Markets take a step back

After a rally on Monday equity markets have given back some of their gains in the second trading day this week as optimism post the G20 summit has begun subsiding. On that account, while Wall Street ended the day with firm gains ranging from 1.1% to 1.5%, Asian investors have not been so optimistic and instead they have decided to shed some their holdings. Shortly after 7:15 am GMT the Hang Seng (CHNComp) is losing 0.65%, the Shanghai Composite is falling 0.2% while stock markets in Australia and Japan closed with substantial decreases equal 1% and 2.4% respectively. Note that the latter could have been influenced by the surging yen which is more than 0.5% up at the time of writing.

The WTI/WCS spread plummeted on Monday in response to lower crude output in Alberta, Canada. Source: Bloomberg

Elsewhere, oil prices are still on the rise extending their excellent performance seen on Monday in response to comments from the G20 summit as well as the news from Canada regarding a production cut from the next year. Note that lower output in Canada has resulted in a massive decrease in the WTI/WCS spread which plunged well below $25 yesterday (the peak in October was almost $50 - take a look at the chart above). On the face of it, it could be the CAD positive, however, the lower level of crude output will lead to lower exports therefore a higher per unit margin will be offset by a lower volume. Nevertheless, this could be supportive of the Canadian dollar in the nearest future.

RBA stays on hold

On the currency front we have the yen and the NZ dollar being the best performing currencies this morning - quite a weird mixture. In terms of macroeconomic releases we were solely offered Japanese monetary base for November which expanded 6.1% YoY compared to 5.9% YoY in October. On the other hand, the Aussie is also rising quite well being 0.25% higher on the day following the Reserve Bank of Australia meeting and some data. The central bank obviously kept rates on hold as widely expected and more or less reiterated its well-known communique. It said that an improvement in the labour market is still expected, it said the same when it comes to inflation seen at 2.25% in 2019. GDP growth is forecast to average around 3-3.5% over the next two years. As far as the exchange rate is concerned, the RBA sticked to its previous stance that the Aussie dollar remains within a range seen in the past two years. In addition to the RBA meeting there were also two macroeconomic readings. The first one concerned net exports for the Q3 coming in at 0.4% of GDP compared to 0.3% expected. Public consumption will add 0.1% to GDP while investment will add 0.2% to GDP for the third quarter (this figure will be released tomorrow). The second one was the third quarter balance of payments producing a current account deficit of 10.7 billion AUD which was a somewhat worse result than expected 10.2 billion AUD. Overall, the consensus ahead of GDP points to 0.6% QoQ and 3.3% YoY with risks tilted to the downside based on the data we were offered in past days.

The AUDUSD is struggling just under the upper limit of the channel. The AUD has benefited from less hawkish FOMC and upbeat revelations related to trade tensions. A breakout of the nearest resistance could result in a move toward 0.7500. Source: xStation5

In the other news:

• The spread between 3Y and 5Y US yields inverted on Monday for the first time in more than a decade, the 10Y yield fell far below 3% at the same time and it is trading at 2.944% this morning; the 2Y/10Y spread is hovering at 0.135%

• Chinese renminbi surged against the dollar for a second day in a row with the PBoC’s reference rate at 6.8939 compared to 6.9431 on Monday

• Italy’s Conte says the country will present a budget proposal to the EU within the next few hours, the aim is to avoid disciplinary procedures