NZD/USD storms higher; Australia's AAA sovereign rating under threat says S&P; RBNZ re-iterates concerns with housing market, OCR cut less likely

By Kymberly Martin

The NZD/USD has stormed higher overnight, despite a broadly stronger USD. The GBP/USD has traded a wide range.

The USD index made a modest gain in the early hours of this morning. The release of the US ADP report was solid. Although it is not well correlated with the US payrolls report, markets tend to use it to gauge risks around the latter. All eyes will now be on tonight’s labour market report to gauge whether May’s disappointment was a ‘one-off’.

The GBP/USD traded higher last evening. UK data releases (house prices and industrial production) came in above expectation but pre-date the Referendum result. The GBP/USD made a valiant attempt to reach 1.3050 just before midnight, but has subsequently slumped to trade at 1.2900.

The AUD/USD experienced a short, sharp drop after rating agency S&P put Australia’s sovereign rating on negative watch early yesterday afternoon. However, it soon grappled its way back to previous levels. A more enduring downtrend took hold overnight, in the backdrop of declining global commodity prices. The CRB global commodity index has declined about 2.4% since yesterday morning, as the WTI oil price has fallen almost 5%. The AUD/USD now trades back down at 0.7480.

But there has been no stopping the NZD. After a period of consolidation yesterday it gained upward momentum overnight. This followed the release of an evening speech from the RBNZ. After the Bank has clearly re-stated its concerns regarding NZ house price appreciation, the market may now feel less confident that the RBNZ is on the verge of another OCR cut. The NZD/USD has traded up to 0.7220.

The NZD has also gained on all of the major crosses. The NZD/AUD has risen steadily from 0.9500 to trade at 0.9660 at present. It is highly likely that chatter of the cross reaching parity will again become fever-pitched. Recall, we came within a hair’s breadth of this level in April 2015.

The NZD is also stronger against its European counterparts. The NZD/GBP has traded up from 0.5500 to 0.5600 overnight. This is within a fraction of the April-2013 highs of 0.5610.

These moves do nothing to help the RBNZ’s desire for a lower NZD (although it was notable the currency did not feature in yesterday’s RBNZ speech on the housing, CPI inflation trade-off). The NZ TWI now trades 77.40. This is its highest level since mid-May last year. Currently, the RBNZ’s greatest assistance could come from a more assertive US Fed. However, this looks unlikely in the immediate future, even if tonight’s US payrolls data proves solid.

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