RBNZ unlikely to cut OCR because of the Christchurch earthquake; Oil price high as Libya unrest heightens

The focus for the NZD remains with the potential impact of the recent earthquake in Christchurch. For now, the focus of everyone involved with the disaster remains on minimising the human cost of such a devastating event. A detailed analysis of the economic impact is still premature.

 

However, after its earlier knee-jerk decline, the NZD/USD eased modestly lower overnight. At around 0.7440 the NZD/USD is now at levels last seen in December last year.

OIS markets continue to price an expectation of rate cuts from the RBNZ. New Zealand swap rates have also declined further, although moderating their initial falls. 1 yr swap rates have fallen over 30bp since prior to the earthquake, with 2 year swap rates declining around 25bp.

 

We continue to believe that a cut by the RBNZ is unlikely. We believe that cutting the nation’s cash rate would be a very blunt instrument, in circumstances that require a much more targeted approach, in order to help minimise the economic impact of the quake. The RBNZ in its statement yesterday said that ‘The Reserve Bank is working hard to assist the recovery as fast as possible in terms of access to financial services, and ensuring markets remain stable’. Significantly the announcement made no mention of the OCR, at all.

 

The NZD remained on a downward trend versus the European currencies overnight, declining from around 0.5470 to close to 0.5410 versus the EUR, and from 0.4630 to around 0.4590 versus the GBP. The NZD/GBP is now trading at levels last seen in September last year. Relative to the AUD the NZD was largely range bound.

 

Although it is difficult to see positive catalysts for the NZD in the near term, we continue to emphasise we do not expect to see a ‘collapse’ in the NZD. We believe the NZD will continue to be supported by higher global commodity prices, even in the backdrop of weaker domestic growth.

The result of these opposing global and domestic factors will be a NZD/USD that remains relatively flat-lined this year, in our view (previously we had forecast the NZD/USD to strengthen to mid year). We expect the NZD/USD to decline gradually next year from elevated levels, although we believe recovering NZ macro-economic factors should regulate the decline.

Support for the NZD/USD, near-term is eyed at 0.7330.

 

Majors

By Kymberly Martin

Risk aversion continues to drive markets globally with ongoing unrest in the Middle East. The USD was relatively flat overnight, however, in the absence of key US data releases. The EUR was broadly stronger.

 

Representing heightened risk aversion the VIX index (a proxy for risk aversion) moved higher to almost 23%, above the spike to 20% that occurred in late January. Equity markets remained under pressure with the Euro Stoxx 50 closing down around 1%, and the S&P500 currently down close to 1%.

 

As demand for “safe haven” assets has increased overnight the gold price is heading back toward all time high levels. US 10 year bond were also being bought in this environment, with yields declining overnight from 3.49% to 3.43%.

 

In the backdrop of declining risk tolerance the weakest performers were the growth, or risk sensitive currencies AUD, CAD and NZD, with the NZD obviously also impacted by local news relating to the Christchurch earthquake.

 

The strongest performing currencies were the Europeans. The EUR/USD moved broadly higher overnight from around 1.3680 to 1.3740.

 

The GBP/USD was somewhat range bound between 1.6220 and 1.6260 overnight, now trading near the lower end of this band. It briefly spiked higher after the release of the Bank of England minutes that showed three BoE members now vote for a rate increase, up from two at the January meeting. BoE chief economist Dale joined Weale and Sentence in voting for a rate increase. Amongst the hawks Sentence voted for an immediate 50bps hike while Weale and Dale voted for a 25bp rise. Dissent remains high within the committee, but the move in bias toward higher rates, seems clear.

 

Tonight, in the UK the release of house price data, will add another piece to the BoE’s puzzle. A busy US schedule will see durable goods orders, initial jobless claims, house price and new home sales releases.

 (Updated with more recent version)