Busy time for markets as central bank policy reviews released; Fed and RBNZ likely to keep rates unchanged

The New Zealand dollar sits near those levels reported in trade on Friday against the USD currently. A retracement was seen on Friday after the better than expected US inflation data, although lows were limited to ahead of .7250. This week should be busy with both the RBNZ and FOMC interest rate decision due on Thursday morning (NZ time). Neither central bank is expected to move although the accompanying commentary will be closely scrutinised. We lack any bias ahead of such key announcements although note the continued support for buying NZD on dips at present.

NZD/AUD (AUD/NZD)

The New Zealand dollar has eased against the Australian dollar since our report on Friday. The move comes as the AUD rallied well yesterday, perhaps in part due to the reviewed RBA Statement on the Conduct of Monetary Policy. This looks to afford greater flexibility on the inflation target, which suggests the bar to the next rate cut may be set higher. Events for the cross to watch this week start with this afternoon’s RBA minutes, tonight’s GDT dairy auction and Thursday’s RBNZ OCR review. For now the recent momentum to the NZ dollar upside appears to have waned, although this week’s events have the potential, as usual, to reverse this bias.

NZD/GBP (GBP/NZD)

The New Zealand dollar has rallied strongly against the UK pound since our report on Friday. The move reflects the fall in the pound after Friday’s (Brexit) reports on the need for the UK to exit the European market single membership in order to satisfy UK voter immigration demands. This week’s focus will be on the RBNZ OCR review on Thursday and earlier FOMC decision (watch of implications on financial markets should the Fed surprise and hike which may lead to ‘risk off’ NZD selling). Key resistance for this cross remains at .5650 (1.7699 support) at the multi-year NZD highs. We see current levels as again appearing attractive for short-term GBP buyers.

 NZD/CAD

The New Zealand dollar has lifted moderately against the Euro since our report on Friday. The move reflects the slight outperformance of the NZD in recent trade, in part thanks to a firmer AUD yesterday and also EUR sentiment which may have felt the effects of fresh Brexit headlines over the weekend. In focus this week are the overnight NZ GDT dairy price auction and RBNZ OCR review on Thursday. Also look to the FOMC just prior to the RBNZ decision for any surprise financial market fall-out (risk-off NZD selling) should the Fed surprise and hike.

NZD/EURO (EURO/NZD)

The New Zealand dollar has lifted moderately against the Canadian dollar since Friday, although for the now the gains have been capped ahead of .9660. Volatility has been somewhat limited since Friday, although a dip was seen in the cross into the week’s end as the NZD underperformed in Friday’s stronger USD environment. Thursday’s RBNZ commentary and OCR review will be important for the cross this week, although again look to the oil market for further leads. Expect tonight’s GDT dairy auction to have a more limited impact. For now momentum remains positive although gains are well extended.

NZD/YEN

The New Zealand dollar is trading barely changed in trade against the Japanese Yen since our commentary on Friday. The lack of volatility was to be expected given the market is ‘on hold’ ahead of key central bank decisions and commentary this week (BOJ tomorrow, RBNZ/FOMC on Thursday NZ time). Look for the outcomes of these decisions to set the foundation for the next move. For now a break of 74.00 support opens the downside to next support at 72.20, especially should the break be a result of central bank policy.

AUD/USD

The Australian dollar has lifted against the USD since our report on Friday. Declines to around .7475 were seen after the stronger than expected US inflation data on Friday. However, a sharp reversal which developed yesterday saw the AUD rally almost a cent from its lows. Some of this move may be attributed to a slight shift announced yesterday in the objectives and framework for Australian monetary policy which look to allow the RBA more latitude on the inflation targeting timeframe (which could raise the hurdle for further rate cuts). Look to the RBA minutes this afternoon for initial direction prior to Wednesday’s (US time) important US FOMC decision.

AUD/GBP (GBP/AUD) 

The Australian dollar has rallied strongly against the UK pound since Friday. Much of the move can be put down to a report out of the UK in the interim which has highlighted the likely need for the UK to exit membership of the European single market in order to achieve UK voter wishes on immigration restrictions. AUD strength was also seen yesterday; in part as the RBA now look to have greater ability to stretch inflation targeting timing when setting interest rates. Events to watch for the cross start with today’s RBA minutes, although tomorrow’s (US time) US FOMC decision may have a more lasting impact- especially should rates be hiked and asset markets impacted (look for ‘risk’ selling).

AUD/EURO (EURO/AUD)

The Australian dollar has lifted in trade against the Euro since our report on Friday. The move reflects the outperformance of the AUD as Brexit headlines again surfaced in Europe. This comes as the RBA now looks to have additional flexibility on inflation target timing which was noted after the release of the new Statement of Conduct of Monetary Policy (AUD+ given the bar to another cut could be raised). Look to the RBA minutes this afternoon for immediate influence and the US FOMC decision tomorrow (US time) for potential additional volatility.

AUD/YEN

The Australian dollar has firmed slightly against the Japanese Yen since our report on Friday. Much of the move can put down to the rally in the AUD yesterday. This was likely because of the changed ability the RBA now has for greater flexibility in targeting inflation timelines when reviewing monetary policy (statement released yesterday, which potentially raises the bar for further RBA cuts). Interest this week will centre on the next 36 hours starting with today’s RBA minutes and then tomorrow’s BoJ monetary policy decision. We lack a bias given the considerable event uncertainty although the momentum remains weak; especially should 75.95/76.00 be cleared properly.

AUD/CAD

The Australian dollar has rallied against the Canadian dollar since our report on Friday. The move reflects a continued soft CAD (which has been pressured by the price of oil) and an AUD which yesterday benefitted from the announcement of increased RBA flexibility to target inflation (which look’s to allow greater flexibility around the hurdle for a further rate cut). In focus this week is today’s RBA minutes, whilst in Canada we look to oil pricing and economic data on Friday (retail sales and inflation). For now we note pressure on the topside of recent ranges.

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Market commentary:

This week will again be a busy one on the central bank policy calendar. The action will start tomorrow when the BoJ announces it decision on how (or whether) to amend its stimulus programme. This comes after it has just extensively reviewed the effectiveness on whether it is achieving its goals (inflation remains well adrift of target). The week’s biggest event will be the US FOMC decision on Wednesday (US time) which looks likely to see the Fed remain on hold (20% odds priced in of a hike) despite inflation and employment being at levels which could justify a move. Following shortly after will be the Reserve Bank of NZ’s official cash rate review which also looks likely to remain on hold in light of their signalling that they prefer to wait for a full Monetary Policy Statement to move- with the next one being in November.

Australia

Interest in Australia last week was centred on Thursday’s August employment report. This saw the level of employment growth underperform expectations, although full-time roles which rose by 11.5k helped balance the release. The data saw employment rise 1.5% in the latest year to August, or 180k roles, of which the vast majority (149k) have been concentrated in part time positions. Other indicators included the NAB business confidence index which rose from the month prior and consumer confidence data which edged higher in its latest read, remaining around its average. Comments the RBA assistant Governor Kent included ones which noted “the abatement of two substantial headwinds” being the decline in the terms of trade and mining investment which should ease towards 2018 (and coincide with a down-turn in the construction cycle) and allow reasonable growth to continue. Key focus for this week will be on this afternoon’s RBA minutes (watching for commentary around inflation, housing and the labour market) and house price numbers.

New Zealand

Focus for the Kiwi centred on the local Q2 GDP report and offshore financial markets for most of last week. The GDP report was slightly weaker than expectations for the quarter, although revisions to prior data ensured that NZ’s annual growth rate at 3.6% remains the envy of most. Key positives in the data was the more broad based nature of the growth which was led by the construction sector as it expanded 5% over the quarter, and 10% so far this year (compared to 1.8% overall for the economy). Other data included the Q2 current account which underperformed expectations and food prices which rose 1.3% in August, although neither release created much interest. August REINZ house price data showed house prices easing (-2.2%); the decline comes as the market begins to feel the soon to be formally implemented next round of LVR restrictions, although prices over the year were still up almost 12% on a year ago. Looking to events this week we have the next in the GDT dairy auction tonight where the 4th consecutive rise in prices is expected. Thursday will be the key day of the week with the RBNZ OCR review. This sees the market placing a very low probability on a cut (~14%) given the preference (to wait for a full MPS) and signalling of the RBNZ in August.

United States

Trade in the greenback was relatively lacklustre for much of last week, although picked up on Friday after the release of the better than expected August inflation report which saw core inflation rise to 2.3% y/y. The data continues the firming trend which has seen the average monthly headline move since April amount to 2.4% annualised, above the Fed’s 2% target, although the Fed’s preferred measure (PCE inflation) sits at only 1.6%. Other data released during the week included misses in retail sales, producer prices and industrial production. Manufacturing data included the Philly Fed and NY Empire indices which both showed improvement on the month, although the latter remained in contraction territory. Michigan consumer sentiment was seen holding steady on the month, although missed the improvement expected. Focus for this week centres squarely on Wednesday’s FOMC meeting which has the market firmly favouring a Fed on hold (20% odds on a hike) as the Fed ‘doves’ continue to focus on the ability of US equity and global financial markets to absorb an increase in rates.

Europe

Last week was a relatively quiet one in Europe which saw the main volatility arrive on the back of Friday’s firmer than expected US inflation data. Data releases included soft inflation numbers out of Germany and across the euro area which matched their prior estimate and remained unchanged from the month prior. The German ZEW highlighted static investor confidence and business confidence which dropped by the most since 2012. German current conditions eased on the month, although euro area economic sentiment rose on the month prior. Industrial production across the Euro-zone fell in July. The result was down 0.5% on July last year and below the consensus for the month, although revisions to the prior data ensured a better year-on-year read. The week so far has started with EU current account data which failed to meet expectations in July. Later in the week we look forward to the ECB economic bulletin, a speech from current ECB president Draghi (Thursday) and various PMI reads on Friday.

United Kingdom

Last week was a poor one for the pound sterling which saw its close on its lows against the greenback on Friday. Friday’s sharp fall came in the environment of a stronger USD, although the main driver was reports on Bloomberg that the UK Chancellor of the Exchequer Philip Hammond was ready to accept that Britain would have to relinquish membership to the EU’s single market in order to achieve the immigration restrictions that voters demand. The news came on the back of a BoE decision a day earlier, which despite leaving rates on hold indicated a bias to lower rates further. Inflation data released earlier in the week was disappointing although positives were seen from the latest numbers on the retail sector and labour market. This week looks set to be quieter with just the CBI Industrial Trends Orders numbers on Thursday of any real note. Other events to watch include a speech from BoE member Cunliffe on Thursday and any further headlines on the Brexit issue.

Japan

Trade in the Yen has been understandably quiet in recent days ahead of tomorrow’s BoJ monetary policy decision. Interest is high and divided over what the central bank will do in response to their recent detailed review of their extreme monetary policy actions. The consensus at this stage appears to be for the bank to announce further additions/tweaks to its easing programme. The form remains highly uncertain and will be interesting given that headline inflation at -0.4% y/y (and 0.5% using the central bank’s core measure) remains well adrift of the 2% target. Data released last week included core machinery numbers which exceeded expectations and a higher quarterly BSI manufacturing index. Industrial production was disappointing in July and contributed to annual output which has dropped 4.2%. Other items of interest this week includes August trade tomorrow and manufacturing PMI data on Friday.

Canada

Last week was particularly quiet for incoming data in Canada. This meant that the CAD was again tethered to the changing fortunes in the price of oil. This saw it close towards it lows of the week (against the greenback) on Friday. This was in response to the weak price of oil which fell on the back of the stronger USD (Friday) and on oil surplus concerns which again remained elevated over the week. The only data point of any note was the July manufacturing shipments release on Friday which fell well short of expectations, although the numbers were overwhelmed by the simultaneous release of the US inflation data. Events of interest this week include another speech from the BoC Governor later today, and wholesale sales on Wednesday, although key data comes on Friday in the form of numbers on inflation and retail sales. Wednesday’s US FOMC meeting will also be watched closely for it implications on the USD, and USD linked commodity pricing.

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Ian Dobbs is a currency analyst with Direct FX You can contact him here »