Inflation expectations of 2.8% would normally suggest a move up in the OCR, but global uncertainty rules

By Mike Burrrowes

NZD

The NZD experience relatively quiet trading over the past 24-hours, holding its own versus the USD. It trades at 0.7490 currently.

Yesterday’s RBNZ 2-year-ahead inflation expectations data showed a slight step down, but very slight. Q4 expectations moved down to 2.82% from 2.86% in Q3. These readings are miles too high to warrant a RBNZ rate cut. Indeed, based on these figures alone, a rate hike would be imminent.

Obviously, with such uncertainty in the global backdrop there is more to be considered than this one indicator. However, the data has prodded the market into reducing expectations of rate cuts from the RBNZ. The market now prices around 17bps of rate cuts in the year ahead. The NZD/USD traded above 0.7510 overnight, before returning to trade around 0.7490, still around levels last seen in March.

Trading on the cross was choppy, but the NZD/AUD has returned to trade at familiar levels around 0.7590. Over the next couple of weeks, as we approach the Dec 8 RBNZ meeting, we expect the market may revisit expectations for rate cuts from the central bank. We do not expect the bank to cut. This should help to underpin the NZD relative to both the AUD and USD, as the deterioration in interest rate differentials is arrested.

There are no NZ data releases today. China’s PMI release should be important for the cross. The previous reading showed the PMI still in expansionary territory at 51.1. A drop below 50.0 would indicate manufacturing activity had fallen into contraction, with negative implications for demand for Australian resources.

Majors
There were relatively contained moves in currency markets over the past 24-hours. The USD bobbed a little lower to trade around 78.20, in the backdrop of stable risk appetite at low levels.

Market attention briefly shifted back to the US overnight. The ‘super committee’ officially announced failure in its attempts to agree on at least $1.2t of deficit cuts. US GDP growth for Q3 was also revised down from 2.5% to 2.0%. However, the S&P500 that was down most of the night, is attempting to rally into the close. This occurred after the IMF announced it will revamp its credit-line program to assist countries with a liquidity crisis. The USD index traded between 78.00 and 78.40 overnight, returning to trade in the middle of that band this morning.

The EUR showed choppy trading overnight. Eurozone consumer confidence for November came in at -20.4  (-21.0 expected), its lowest level since September 2009. This suggests the economic and political dramas of Europe will continue to weigh on consumer behaviour. The EUR/USD touched above 1.3560 overnight, before returning to trade around 1.3510 currently.

The GBP/USD dipped to 1.5580 overnight, before returning to trade at 1.5640 this morning. The release of Bank of England minutes this evening will shed light on the prospects for further quantitative easing, for this weak economy.

The AUD has been remarkably range-bound over the past 24-hours, with a heartbeat tracking sideways at the 0.9850 level. Today, we get the AU conference board leading index. Also look out for the RBA’s Debelle speaking on Basel III in Sydney. The release of the Chinese PMI today will also be important for the AUD.

Tonight we get the European PMI, along with US durable goods orders and University of Michigan confidence.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.