By Raiko Shareef
NZ Dollar
NZD/USD sits at similar levels to yesterday morning, just 0.1% higher at 0.7370. But that characterisation disguises significant volatility in the wake of RBNZ Governor Wheeler’s speech yesterday.
This was a market looking for indications that the RBNZ might soon join the growing camp of central banks that have cut policy rates in 2015. Little wonder that, on the buzzer, the newswire headline that attracted the most attention was “Wheeler: rate cut may be warranted if price pressures ease more.” NZD promptly dropped 50pts.
But that was a head-fake. The true conclusion, as the Governor clearly stated, was that “a period of OCR stability is the most prudent option.” NZD/USD quickly recovered its losses, and went on to test resistance at 0.7450.
To us, this was a particularly well-considered speech, and worth reading in full. Governor Wheeler gave a full airing of the issues affecting the Bank’s thinking, in what was effectively a miniature Monetary Policy Statement. Its measured tone, noting the balance between a robust domestic economy and an uncertain international picture, should draw a line under some of the more hysterical commentary of recent weeks.
The RBNZ’s next move will not be driven by some reactionary desire to fall in line with global peers. It will, appropriately, be driven by data. Specifically, the RBNZ is closely watching the prices of oil, housing, dairy, and the NZD.
For NZD, the pull-back in rate cut expectations should prove supportive. Following last week’s surprise decision to drop the tightening bias, we were wary that NZD/USD could drop rapidly to 0.70. We were concerned that the market would ignore robust activity data in favour of softening inflation data. But Governor Wheeler’s emphasis on New Zealand’s above-trend growth will remove the market’s blinkers.
Yesterday’s employment report is a case in point. While the unemployment rate rose unexpectedly from 5.4% to 5.7%, that was driven by a massive rise in participation, from 69.0% to 69.7%. The overall employment rate rose from 65.3% to 65.7% - near all-time highs. Wage pressures remained subdued. This vindicates the RBNZ’s decision to push back on the talk of rate cuts – this was a very strong report.
Over the near-term, the bigger driver for NZD/USD will come from the latter part of that equation. We think that a broad USD consolidation is brewing, but remain positive on the USD over the medium-term. We see NZD/USD at 0.70 by year-end.
There are no local data releases today. We pick a 0.7300 – 0.7420 range for the day.
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Majors
The USD has regained about half its losses from yesterday’s snap. Some of the optimism around the prospects for oil as well as an amicable solution to Greece has faded.
WTI crude oil is off by more than 7% this morning, back below the $50 mark, with a milder fall in Brent crude. Analysts have pushed back strongly against the speculative optimism demonstrated over the past few sessions, pointing out that it will take some time for falling oil rig counts to translate into lower supply. That vein of commentary has taken the shine off oil. As a result, CAD is the worst-performing major currency overnight, falling by 1.1% against the USD to 1.2550.
Similarly, after yesterday’s touting of a possible Greek debt swap, German Chancellor Merkel injected a dose of realism into the picture. She said, “I don’t think that the positions of the member states within the euro area with regard to Greece differ, at least in terms of substance.” The insinuation here is that, while Greece’s proposed solutions appear attractive to investors, it is far from certain its debtors feel the same way. EUR has come off its highs, sitting 0.5% lower at 1.1420.
Elsewhere, China joined the global easing party by cutting its Reserve Ratio Requirement by 50bps to 19.5%. The Chinese authorities appear to be concerting efforts to provide modest amounts of stimulus to avoid a hard landing in growth. AUD and NZD saw very brief spurts higher, but these were very quickly reversed. AUD is 0.4% weaker at 0.7760.
Today, Australian retail sales and German factory orders will be watched, but are unlikely to significantly change the market mood ahead of the US employment reports on Friday night.
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