NZD will fall today if the markets think the RBNZ is downgrading its inflation assessment: BNZ

by Raiko Shareef

NZ Dollar

The NZD is a little lower this morning ahead of the RBNZ policy decision.

The NZD/USD is 0.2% softer at 0.8580.

The collapse in AUD following Australia’s soft inflation print pushed the NZD/AUD higher over yesterday’s session.

It gained 0.7% to 0.9250.

While yesterday’s net migration data was not market-moving, it was certainly eye-catching.

NZ saw a net inflow of 3,840 migrants in March, the second strongest monthly gain ever (behind a 4,720 net inflow in February 2003).

The annual net inflow is now 31,914 from 2,542 a year ago. All else unchanged, these figures equate to more domestic demand, more pressure on domestic resources (including the housing stock), and upward pressure on inflation.

This will not be lost on the RBNZ.

All eyes are on the RBNZ for the April OCR Review this morning. For us, the key risk is around any comment on the NZ TWI and its impact on inflation.

Any indication that the RBNZ has downgraded its assessment of inflation would see the NZD fall further today.

Also watch out for any commentary regarding a falling terms of trade, which would imply that a persistently elevated NZD will be overvalued.

Today we see initial support at 0.8520, and resistance at 0.8670.

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Majors

Safe havens are stronger this morning, due to a deteriorating situation in Ukraine as well as poor US economic data.

Overnight, there were further signs that Thursday’s accord to de-escalate tensions was splintering. Ukraine announced the resumption of military operations to remove separatists from its eastern cities. Russia responded that it would retaliate if Russian citizens are attacked. The fact that the US is sending troops (albeit in small numbers) to countries bordering Russia certainly did nothing to help the situation.

A shocking US housing report also dampened sentiment. New home sales fell by 14.5% m/m in March, worse than even the most pessimistic analyst had expected. The consensus had picked a 2.3% rise. This series had held up relatively well through January and February, despite the poor weather, so the latest print warrants concern. Analysts blamed reduced affordability thanks to higher house prices and borrowing costs that are 100bps higher than they were a year ago.

As a result, the S&P 500 snapped a six-day winning streak, and is currently 0.2% lower for the day. European equities are also lower, while the JPY, CHF, and gold are all stronger.

The AUD was the worst performing G10 currency, thanks to a softer-than-expected inflation reading. Headline CPI inflation rose 0.2% to 2.9% y/y in Q1 2014, falling short of the 3.2% expected by the market. More importantly, underlying inflation remained unchanged at 2.6% y/y, against expectations of a rise to 2.9%. The AUD had made gains over the week in anticipation of a strong reading that might push the RBA closer to a hiking bias. This outturn buys the RBA more time, and saw the AUD/USD fall 0.9% for the day to 0.9280.

Offsetting surprises in preliminary PMIs for France (negative) and Germany (positive) caused some volatility in the EUR. The euro-zone’s composite PMI rose to 54.0 in April against expectations for it to be broadly unchanged, supporting a slight strengthening of EUR/USD to 1.3820. The currency remains capped by continued rhetoric from ECB officials, with Coeure the latest to point out that a strengthening EUR might provoke an ECB response to combat stagnant inflation.

Lastly, the GBP lost a bit of ground overnight, despite a set of upbeat minutes from the Bank of England and a 41-year high struck in CBI’s quarterly update of manufacturing confidence. The GBP/USD is 0.3% lower at 1.6780.

Today sees a much lighter data calendar internationally. Germany’s IFO business survey will garner some attention, but the main focus will be on US durable goods orders.

All its research is available here.