Opinion: Wholesale interest rates jump as OCR hike talk grows

By Danica Hampton NZD/USD surged to a smidge under 0.7490 last night, a fresh 15-month high. Yesterday's stronger-than-expected Q3 CPI lit a rocket under the local currency. CPI came in at 1.3%q/q, well above the 0.8% both we and the market had been expecting. The data had investors scrambling to bring forward the expected timing of anticipated RBNZ rate hikes. Market pricing is now consistent with about a 30% chance of a 25bps hike in December and 150-175bps of tightening by the middle of 2010. NZ 2-year swap rates rose 23bps to 4.60% yesterday as investors got more hawkish on the outlook for NZ monetary policy. And the widening of NZ-US interest rate spreads helped underpin NZD/USD. See swap rate charts here.

Despite the stronger-than-expected CPI, NZD/AUD has slipped over the past 24 hours "“ from nearly 0.8140 to below 0.8080. The AUD was bolstered by hawkish comments from RBA Governor Stevens who made it clear that the Australian cash rate may move higher at a faster pace than currently anticipated over coming months. Real money demand from a variety of accounts also provided an additional prop for AUD/USD overnight. We see scope for NZD/AUD to push a little lower in coming weeks, but doubt that dips below 0.8000 will be sustainable (see yesterday's BNZ Strategist for more detail on our NZD/AUD view). Growing confidence in the global economic recovery has also helped support growth sensitive currencies like NZD over the past few days. Following hot the heels of yesterday's bumper JPMorgan Chase earnings report, both Citigroup and Goldman Sachs beat analyst expectations last night. Citigroup posted a Q3 loss of US$3.2b, while Goldman Sachs reported a US$3.2b profit. The S&P500 is currently flat, but it remains close to a 15-month high. For today, growing confidence in the global economic recovery and increasing conviction about RBNZ rate hikes, should help underpin NZD/USD on dips towards 0.7400. Initial headwinds are expected ahead of 0.7490-0.7500. The USD shuffled sideways against most major currencies last night. The darling of the market was GBP, which surged more than 1.2% against the USD from around 1.6000 to above 1.6250. Heavy selling of EUR/GBP following comments from ECB President Trichet helped support GBP/USD. When asked about the recent slide in the USD, Trichet said "excessive volatility is an enemy from the standpoint of stability and prosperity of the global economy". EUR/USD sank from above 1.4960 to below 1.4860, but rebounded back above 1.4900 later in the night. JPY weakness was the other stand-out theme of the night. USD/JPY surged from below 89.50 to nearly 90.80, underpinned by comments from Japan's Finance Minister Fujii (who clarified that he never explicitly called for a stronger JPY and authorities could intervene if currency moves got out of hand) and improving risk appetite (which helped fuel demand for JPY crosses like GBP/JPY and EUR/JPY). Wall Street has chalked up modest gains after Citigroup and Goldman Sachs reported quarterly earnings results. Goldman Sachs reported a Q3 profit of US$3.2b, while Citigroup posted a loss of US$3.2b (or 27 cents per share). While the result beat most analyst expectations, after the bumper result from JPMorgan Chase yesterday investors were unimpressed. The S&P500 is currently flat, but it remains close to a 15-month high. The US data was a little mixed. First time claims for unemployment benefits rose just 514,000 (in the week ending October 11) "“ better than the 520,000 forecast by economists. Continuing claims dipped below six million (in the week ending October 4), offering some hope that the labour market may be stabilising. The Empire manufacturing index beat expectations (rising to 34.57 in October vs. 17.25 forecast), while the Philadelphia Fed Index disappointed (falling to 11.5 in October vs. 12.0 forecast). Meantime, US CPI rose by 0.2%m/m in September (the smallest monthly increase since July) leaving annual inflation at -1.3% (vs. -1.4% forecast). Looking ahead, the near-term fortunes of the USD will rest with risk appetite and global sentiment. Should upcoming Q3 earnings reports continue to surpass expectations, and equities continue to push higher, the USD will likely remain under selling pressure. However, we are mindful that after the USD Index fell to a fresh 14-month low yesterday, we may well see some profit-taking ahead of the weekend. In any case, further USD weakness will likely elicit concerned rhetoric from policymakers worldwide. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.