NZD adjusts quickly to cut in NZ policy rate. AU employment data now tracks better than RBA assumptions, pushing back AU cut prospects

By Kymberly Martin

The NZD has been the standout underperformer over the past 24-hours.

The USD is broadly stronger against its peers.

Yesterday’s RBNZ meeting promised to be one of the more interesting in recent times. It did not fail in this respect.

The RBNZ cuts its cash rate, against the market’s slightly less than 50% pricing of this outcome. The NZD’s response was abrupt. The NZD/USD dropped like a stone. From 0.7200, it suddenly found itself at 0.7050. After settling at this level it has drifted steadily lower overnight to trade just below 0.7000 currently. This is its lowest level since Aug 2010.

As the RBNZ has now embarked on an easing cycle that will promptly deliver at least one more 25 bps cut, we have nudged lower our end of year forecasts for NZD/USD, from 0.7000, to 0.6800. However, our end-2016 target of 0.6600 remains unchanged. Near-term support will likely be encountered approaching 0.6950 while resistance is eyed at 0.7050.

Unsurprisingly, the NZD has also plunged on all the major crosses. The fall in the NZD/GBP is unlikely to go unnoticed by many a UK-returned kiwi. The NZD/GBP has fallen 2.7% over the past 24-hours, to 0.4510. This level was last glimpsed in March 2011. Support is now eyed at 0.4440.

The NZD/AUD was battered from both sides yesterday.

After the RBNZ delivered its rate cut the AU employment report then offered a positive surprise. The unemployment rate is now tracking below the RBA’s May forecast track. Our NAB colleagues continue to suspect the RBA will not need to cut the cash rate further, from its current level of 2.0%. The NZD/AUD has fallen from 0.9290 yesterday morning to 0.9040 currently. We now target 0.9200 for year-end.

The AUD/USD initially surged higher on the employment report, briefly spiking above 0.7790, but has subsequently returned to trade at 0.7740.

Overnight, there was a bit of currency volatility around the release of US retail sales data. An initial spike higher in the USD on the solid data proved unsustainable. The USD index fell back to trade a little higher than yesterday morning’s levels, at 95.20.

The NZD will likely continue to lick its wounds today, and is unlikely to show much response to today’s domestic data releases (PMI, food prices). There is a smattering of offshore data, but no standout releases into weekend.