Risk sentiment improved again overnight but NZD is at the bottom of the leaderboard following a surprise announcement from the RBNZ, significantly underperforming other commodity currencies.
Mid-afternoon yesterday, the RBNZ announced that it would issue a brief update on its economic assessment next Thursday, given the longer-than-usual gap between the June and August Monetary Policy Statements.
The natural conclusion the market took was that the Bank was not happy with current market conditions. As previously noted, we believe that the market over-reacted to the RBNZ’s housing market speech last week, sending rates and the NZD higher. That market reaction came despite an already strong NZD that will make a return to the mid-point of inflation target much more difficult to achieve. Next week’s update gives the RBNZ a chance to guide market expectations well ahead of the August rates review.
Trading at 0.7285 before the announcement, the NZD fell sharply and lost further ground overnight, reaching a low of 0.7176 early this morning before settling just above 0.72. The NZ TWI is at 76.9, its lowest level for the week but still about 30 pips above last week’s pre-speech level.
The weaker NZD is expected to be sustained heading into next week’s highly anticipated statement and, if the Bank has learnt anything from previous communication missteps, then it should be able to deliver a further blow to the NZD.
A message along the lines of “if the recent gains in the NZD are sustained then the medium-term inflation outlook will be much weaker than previously expected” would do the trick. Monday’s CPI release is the only local event in the way of that view. A much higher than expected CPI figure or the RBNZ not delivering that sort of message would send the NZD smartly back up.
Robust employment data supported the AUD and it has sustained those gains overnight and trades at 0.7635. Thus, NZD/AUD is down sharply, falling more than 1.2% to 0.9445, reaching its lowest level in about five weeks.
GBP has also been a big mover. In an 8-1 MPC vote, the Bank of England didn’t deliver the rate cut the market expected. This saw GBP up sharply to a peak of 1.3475, but it has since fallen back down to 1.3330, still up 1.4% for the day. The BoE’s next policy decision is only three weeks away and the MPC minutes signalled it would likely add stimulus then, following the full forecast round that comes with the publication of its ‘Inflation Report’.
JPY remains under pressure as speculation continues to mount about further likely stimulus measures. USD/JPY shot up to around 105.50 following headlines that “Bernanke floated Japan perpetual bonds idea to Abe advisor”. This is essentially helicopter money, with the BoJ the only buyer in town of such zero-value bonds, but at the same time getting around any possible legal issues. However, we’ve had officials this week denying that such a radical plan is on the agenda.
Elsewhere, EUR is up 0.3% to 1.1120, no doubt seeing some spillover from more positive GBP sentiment and that means the USD indices are all slightly lower, despite the market ever so slightly building in an increased chance of the US Fed tightening over the next 6-9 months.
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