Better risk appetite helps commodity currencies including the NZD, but gains dependent on tone in today's RBNZ statement

By Kymberly Martin

The general improvement in sentiment continued overnight.

Over the past 24-hours the NZD has been the best performer and the JPY the worst in a classic ‘risk-on’ trade.

Further gains in Asian equity markets set the stage for a better tone in markets overnight. European equities also made solid gains (although the US S&P500 is currently struggling to keep its head above water).

A pullback in the global oil price helped curtail a sell-off in longer-dated global bonds in the early hours of this morning. However, the ‘commodity-linked’ AUD and NZD remained relatively resilient, assisted by better risk appetite.

The NZD/USD has extended its rebound, outperforming all its peers. Still it ran into resistance above 0.6420 overnight and now trades just below 0.6400, ahead of this morning’s RBNZ meeting. The currency’s move in the past couple of days likely reflects some short covering, on the prospect that the RBNZ does not accompany today’s expected rate cut with an aggressively dovish message. This outcome may therefore not produce a strong response from the currency, but we remain wary of a further short-term squeeze higher. Over the longer-term we continue to target 0.6200 by year-end.

On the crosses, the NZD/JPY has made a notable recovery, as the ‘safe haven’ JPY has been shunned as risk sentiment has improved. From 76.00 yesterday morning the NZD/JPY traded above 77.80 overnight before returning to 77.00 currently.

The NZD/GBP has also made gains after the GBP/USD experienced a nasty gap lower following the release of disappointing UK industrial production data. The NZD/GBP has traded up to 0.4160 currently.

The CAD experienced some sharp volatility around the Bank of Canada meeting last night. The CAD gapped higher against the USD as the BoC left its cash rate unchanged and commented that the weaker CAD was helping the economy (see Interest Rates). Later the USD/CAD returned to its previous level, around 1.3240.

Today the local spotlight will be on the RBNZ and this afternoon’s AU employment report. Our NAB colleague’s expectations are close to consensus. i.e. for a 6K employment increase and for the unemployment rate to tick down from 6.3% to 6.2%. Ahead of this the AUD/USD sits around 0.7020 this morning, some way back from its intra-night highs.

Tonight, focus will be on the meeting of the Bank of England. Although no change of rates is expect, the market will be looking for pointers as to when to expect a first BoE hike. In recent months the market has pushed back its expectations of a first rate hike from the BoE to late 2016-early 2017.

Kymberly Martin is on the BNZ Research team. All its research is available here.