by Kymberly Martin
Local markets will open to familiar levels for the NZD/USD, at 0.8240 this morning, after traversing inside a 0.8225/0.8325 range in offshore markets. The London session for much of their day quite happy to trade with some favour for the NZD following the lead of sentiment post yesterday’s MPS.
Yesterday’s December Monetary Statement saw the OCR unchanged, importantly there was a clear indication that the first hike in rates is scheduled for the March quarter 2014, and the cash rate is then expected to move progressively higher to above neutral in the second half of 2015
While we had a contrarian view on what was appropriate, the Bank’s response was bang on our expectations so we see no reason to change our own rate track, which is now almost identical to the Reserve Bank’s published view.
From a market perspective, there were three important messages in the statement:
- The Reserve Bank all but ruled out the possibility that the cash rate would be raised in January. For January to have been a meaningful possibility the Bank would have had to set it up in this statement. There was no sign of this. Moreover, we can’t help but feel that with the cash rate having been unmoved for over two years now, the RBNZ would be more comfortable adjusting it at a Monetary Policy Statement, when it can fully explain its actions, than at an OCR review.
- It is rare for cash rates to peak at neutral during a tightening cycle. The Reserve Bank suggests that rates will, indeed, go through this level. A neutral cash rate is around 4.25% but the Bank has the OCR at 4.5% - 4.75% at the end of its forecast horizon (March 2016). Importantly, the RBNZ’s published rate track is on a rising trend at the end of that forecast horizon intimating that the ultimate peak may yet be even higher.
- The Reserve Bank acknowledges that the New Zealand dollar is likely to stay stronger for longer.
Of course there are a multitude of risks around the Reserve Bank’s forecasts but, if our forecasts are right, there will be no news between now and January to change the RBNZ’s perceptions of the world.
This morning markets will note a much stronger NZDAUD rate (0.9230) and for the most part a broadly stronger USD, the greenback on the front foot.
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The USD is on a slightly firmer footing, with most asset classes reflecting an increased anticipation of tapering in the US. Retail Sales for November beat forecasts, printing at +0.7% (vs. consensus +0.6%) with past revisions also showing improvements.
Weekly Jobless Claims weren’t so flash, printing a 368k outcome vs. 320k expectations. Analysts have explained that rough number away though with notes that the data was impacted by seasonal factors.
UST and equity markets have traded with an offered bias, sentiment coloured by the Retail numbers and some paring of positioning in the countdown to next week’s Federal Reserve FOMC.
Stand-out overnight though is the demise of the AUD, tipped over a precipice by media headlines of an AFR interview with the RBA’s Stevens. The headlines certainly were to an extent taken out of context from the full text, but the response in markets was decisive as the AUD fell from above the 0.9050 to test below 0.8950 (and lower over the subsequent hours).
Much of the interview is familiar commentary from Stevens as he notes a lower AUD is preferable to easing monetary policy (the cash rate) to spur the economy. He did add he hopes the Federal Reserve starts tapering before too much longer.
In other news from overnight, a scan of the wires shows that barely has the potential US Budget deal been announced than the squabbling has begun on both sides of the political divide.
However it is arguably no less likely to be voted through Congress despite the rancorous atmosphere.
In Europe the ECB Monthly Report affirmed that monetary policy will remain accommodative, while Draghi in addressing the EU parliament notes the economic recovery has been weak and that he anticipates ongoing inflation weakness.
Nothing new to see there really and no great surprise then that European Industrial Production updates (for October) were poor. Their release couldn’t have been timed better, printing a -1.1% outcome well below forecasts of +0.3%. The SNB left monetary settings unchanged, no surprise in that outcome or similarly from the central banks of Indonesia, the Philippines or South Korea earlier during our day.
Looking ahead to the end of the week there’s Japanese Industrial Production data later today, while local commentators will pay attention to the monthly update of the BNZ PMI and ANZ-RM Consumer Confidence surveys.
Both series should remain relatively strong, noting previous prints of 55.7 and 128.4 respectively.