Weaker US GDP gives NZD boost; underwhelming BoJ policy easing hits USD

By Jason Wong

There was a lot of information flow to digest on Friday, with the net result being a weaker USD across the board and a strong Yen and NZD.

USD/JPY closed the week just over 102, down about 3%. This reflected a double whammy of an underwhelming policy easing by the Bank of Japan and weak US GDP data, which triggered a weaker USD across the board.

The BoJ left its policy rate at -0.10% and kept its targeted increase in the monetary base at ¥80 Trillion. 

Purchases of ETFs would be expanded slightly while the only real stimulus to the economy would come from an increase in its dollar-lending facility to businesses. 

The Bank will mount a “comprehensive review of its policy framework” at the next meeting. The lack of policy action is consistent with the view that monetary policy options from here are pretty limited and it is now over to fiscal policy to provide any support to the economy.  The outline of Abe’s fiscal package will be announced on Tuesday. 

The USD remained under pressure, following the lack of intent to tighten monetary policy by the FOMC on Thursday. There was another lurch lower following a GDP report which showed the economy expanded by an annual rate of just 1.2% in the June quarter, following downwardly revised figures of 0.8% for Q1 and 0.9% for Q4’15.

Weaker than expected inventories explained much of the ‘miss’, portending better growth ahead, but the weak overall result, the downward revisions to growth and the soft GDP deflator were enough to keep downward pressure on the USD, taking it to a 3-week low.

NZD closed the week just over the 0.72 mark and up circa 2% for the day. It was bid higher during the local trading session, following strong building consents data and a robust ANZ business outlook survey. 

The weak US GDP figures provided an additional boost. The NZD ended up being one of the strongest currencies, taking the TWI up to 76.7. Thus, the fall in the TWI following the weak CPI figure and the dovish RBNZ Statement has now been fully unwound. 

NZ’s strong relative economic performance and the lack of support for US monetary policy tightening suggest that the ‘stronger-for-longer’ NZD theme is likely to prevail, with NZ rate cuts doing little to prevent that outcome.

The AUD closed the week around the 0.76 mark and NZD/AUD just under 0.95. EUR is threatening 1.12 again, while GBP touched 1.33 before ending the week at 1.3230. Eurozone GDP rose by 0.3% q/q and 1.6% y/y, not great but, interestingly, the economy has still expanded at a faster clip than the US over the past year.

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