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Currency Market Analysis

Dec 06, 2019 | Currency Market Analysis

Global Themes

Higher love

• Bank capital stretch boosts Kiwi
• Here’s a call for a higher NZD/AUD
• US jobs in the gun

Bank capital stretch boosts Kiwi

It’s a Friday in the festive season so depending on your preference turn up some Steve Winwood, or the more recently hologram mashed Kygo and Whitney Houston with a remix of “Higher Love”. That’s precisely what Kiwi pairs felt yesterday, as a mix of comments and policy announcements from RBNZ Governor Adrian Orr helped extend the recent rally in the bird. Changes to banking capital requirements will now see large banks (read the big four) require 18% of capital to be held with the RBNZ, with smaller banks needing to stump up 14%. Of that 18% just 16% will need to be tier one capital, but more importantly the period for mandatory adherence has been pushed out from five to seven years. The markets took that as less draconian as originally thought and that pushed Kiwi pairs higher.

The net effect here though is likely to be an added cost in “fat” to mortgage rates in the medium term; 15 basis points higher if you listen to the RBNZ, half a percent more if you listen to the major banks. That effectively means monetary policy will have to work that little bit harder to achieve the same goal. As Governor Orr stressed yesterday the RBNZ is categorically “on hold” for now. That’s also a near term positive for Kiwi pairs, but the banking capital changes are also likely to leave the Kiwi on hold for longer than it may previously have been, and in the longer term that might see the Kiwi lag in an environment of a global recovery in interest rates. We’d have to admit we’re a long way from that just now though.

Here’s a call for a higher NZD/AUD

Sticking to our higher theme today and the Commonwealth Bank put out a call yesterday for AUD/NZD to go to 1.02 - or 0.98 in NZD/AUD terms. Their rationale is simple - economic divergence, which is being reflected in a 42 basis point difference in the 1 year overnight interest swap in favour of the NZD. Typically that swap rate is the primary driver of this cross, and CBA see no reason it can’t go beyond half a percent with further RBA cuts next year, taking NZD/AUD higher with it.

A flat retail sales number and lower Australian trade balance yesterday added fuel to that view, and sees NZD/AUD at fresh four month highs today. Should the cross move up to 0.98 we like Kiwi pairs higher across the board, and seasonally we have noted drift in NZD/AUD through the holiday period. But we’re a little cautious about extending predictions well beyond the 0.96 range given a) it historically doesn’t stay above there often, b) that might just get the RBNZ rethinking its “on hold” status next year and c) we think we’re starting to see some rebound in Chinese activity which would be AUD positive. For now though it must be said the trend is the importer’s friend.

US jobs in the gun

It’s all about US jobs tonight and an early week median economists’ expectation for a gain of 186K jobs is now looking rather lofty after Wednesday night’s disappointing miss in private sector hiring. A rise of 0.3% in monthly wage inflation is also expected.

For us this is a big risk for the US Dollar, particularly if the number fails to hit triple figures. To be fair there is not always a great correlation between the earlier private sector print with the overall non-farm employment number, but we think there might be tonight, and a weak return might just give NZD/USD a little more of that “higher love”.

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