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Currency Market Analysis

Jun 26, 2019 | Currency Market Analysis

Global Themes

Poking the bear

Kiwi rallies as markets scale back rate cut expectations for RBNZ today

The New Zealand Dollar rallied around half a percent higher yesterday on most major pairs, amidst speculation that the RBNZ will hold on rates when they make their announcement later today.

Overnight swap markets indicate that the chances of a cut have reduced from 32% to begin this week to sit at around 20% this morning. Solid credit card spending data for May on Monday followed by a beat on trade balance numbers yesterday have helped add to the picture that the local economy is holding up better than the RBNZ had forecast when it last moved on rates in early May, and underpins the case to be patient on rates.

Nonetheless most of the major banks are foreshadowing another rate cut from the Reserve Bank in August. If that is the case then we’d expect to see a clear indication of that from Governor Orr today.

Certainly the recent strength in the currency is a stark reminder that should he fail to deliver an overt easing bias, markets may continue to push Kiwi pairs higher, given both the RBA and Fed look like they may cut before the RBNZ meet again next month.

That will surely poke the bear into a cautious statement today aimed at taking some steam out of the NZD but we’re not sure we will get a clear August cut signal from Governor Orr. Rather we think he will place high emphasis on upcoming inflation (July 16) and employment (July 31) releases as major determinants in their August decision, and that “wait and see” approach might ultimately be enough to keep the NZD buoyant as we head into quarter end.
Fed’s Powell reticently cautious

Warning against knee jerk reactive policy sends a message to markets

This week’s rally in NZD/USD hit a snag early this morning when Fed Chair Powell delivered a pretty clear message to markets - don’t get ahead of yourself.

As markets ratcheted up the chances for a 50 basis points cut late last week we suggested we may see this, and Powell delivered, warning against knee jerk policy reactions. Nonetheless he acknowledged things had changed “significantly” since May 1, and that if you see weakness in an economy it is better to act sooner rather than later.

In a nutshell that is Powell curbing market expectations for a half percent cut, and while they might not be confirming a 25 basis points either, the lack of denial to a market fully pricing that outcome in is as good a franking as you’ll get from the cryptologists at the Fed.

For NZD/USD that might cap gains to the April highs sub 0.67 in the near term, but that will be very much dependent on the message the RBNZ delivers this afternoon.

G-20 summit eyed

Can Trump/Xi get a deal done?

While the RBNZ announcement at 2pm is a clear market focus let’s not forget about the scheduled meeting between Presidents Trump and Xi today in Osaka. By his own admission Trump uses tariffs to leverage negotiations in favour of a fairer trade relations, and so maybe he is finally ready to get a deal done. Yen pairs will be the most sensitive to this outcome.

Tonight we get a Bank of England inflation report and US durable goods data, which can exaggerate any RBNZ fuelled moves in NZD/USD and NZD/GBP seen today.

By Alex Ross, NZ Corporate FX Dealer

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