Markets reduce its pricing of an RBA rate cut to 40%, down from 70%; less support seen for NZD over rest of the year

by Kymberly Martin

NZ Dollar

The NZD/USD sits fractionally higher at 0.8690 this morning, ahead of the RBNZ’s (9am NZT) meeting.

There was little on the domestic agenda to drive the currency yesterday, although there was some position squaring in rates markets ahead of today’s RBNZ meeting.

It was AU data the provided the catalyst for the NZD yesterday afternoon. As AU CPI surprised to the upside (see Majors), the NZD/USD popped higher in sympathy with the AUD. A steady uptrend then continued through the early evening to take NZD/USD to around 0.8690.

Meanwhile the NZD/AUD dropped like a stone after the CPI release. From above 0.9230 prior, the cross plunged to below 0.9000, before drifting down to 0.9190 this morning. There now lies a solid line of support around the 0.9160 level. The cross now sits at the lower-end of what we consider to be the current, fundamental ‘fair value’ range.

By contrast, the NZD/GBP sits notably higher this morning after the release of Bank of England Minutes overnight. From around 0.5070 last evening, this cross now sits at 0.5100.

Today it is all eyes on the RBNZ meeting. We anticipate the RBNZ will raise the OCR by 25 bps. Although this outcome is around 85% prices by the market it may still cause an initial knee-jerk pop higher in the NZD/USD.

However, we also believe the RBNZ’s statement will clearly outline the Bank is now on pause.

Resumption of its tightening cycle will be dependent on developments over coming months. This broader message will likely be less supportive of the NZD/USD, given the market still prices some chance of further rate hikes in September and October.

We see near-term NZD/USD support at 0.8650 and resistance at 0.8720.

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Majors

The AUD was the strongest performer over the past 24-hours, while the GBP was the weakest.

The USD and EUR largely tracked sideways in the absence of key data releases overnight and generally fairly placid markets. Equities on either side of the Atlantic provided modest positive returns (0.1-0.2%) while US bond yields traded fairly tight ranges.

The more notable moves came from the GBP and AUD, driven off respective domestic fundamentals.

First up yesterday afternoon, the AU 2Q CPI release surprised to the upside. The trimmed mean measure came in at 0.8%q/q (2.9%y/y) vs. consensus expectation of 0.6%. The rise will serve as a reminder to the RBA that some moderate price rises are still coming through across the CPI basket. But overall, yesterday’s data will likely reinforce the RBA view that “the most prudent course is likely to be a period of stability in interest rates”. The market has reduced its pricing of an RBA rate cut to 40%, from as high as 70% in recent weeks. The AUD/USD shot higher on the CPI release, to sit at 0.9450 this morning.

By contrast, the GBP/USD sits lower this morning. Last night the Bank of England’s Minutes were released, showing a 9-0 vote to keep rates unchanged at 0.5%. The commentary was a tad more dovish than the market had expected. While members acknowledged UK growth momentum, they saw little indications of inflationary pressures building. The Minutes also stated that “A premature tightening in monetary policy might leave the economy vulnerable to shocks”. From above 1.7090 prior to the Minutes the GBP/USD now sits at 1.7030.

The China HSBC July PMI flash estimate will be released today. Consensus expects an inch up to 51.0 from 50.7 previously. This could be sufficient to maintain upward momentum in the AUD/USD. Above 0.9450, the next crucial line of resistance lies at 0.9500. Tonight, UK retail sales data will be released along with EU and US PMI data.

All its research is available here.