It has been a quiet start to the week, with low volumes and no significant market movements, although commodity currencies are on the soft side. Locally, attention will turn to today’s CPI data, while globally the key release is Thursday night’s ECB meeting.
The economic calendar has been light. China’s data dump yesterday was positive, with the key monthly indicators all beating market expectations and GDP growth steady at 6.9%, a touch above expectations. There was little market reaction to this. Normally, one might have expected the China-sensitive AUD to spike higher on this, but it had such a good run last week (+3%) that any buying pressure was exhausted. The AUD has actually lost ground after ending last week on a strong note, down 0.4% and dipping below 0.7800 during the drafting of this note. Overnight, the second-tier US empire manufacturing index was weaker than expected, continuing the run of soft US data, but market reaction was muted.
The commodity currencies have underperformed, with the NZD, AUD and CAD all down about 0.4% from the weekend close. During a quiet Asian session, the NZD fell 25pips after the release of RBNZ Deputy Governor Bascand’s speech on NZ’s external accounts, as the newswires reported a phrasing buried on page 14 that suggested a “lower NZ dollar would help rebalance growth”. The fact that such language was deliberately omitted from the press release suggested that the Bank wasn’t trying to draw attention to the NZD. Indeed, a careful reading of the speech in fact gave a positive NZD story, with a chart showing the NZD not keeping up with NZ’s record terms of trade and Bascand suggesting that the improvement in NZ’s net foreign liabilities to GDP ratio “suggests that the exchange rate may be more sustainable”. We agree and our working assumption has long been that the equilibrium value of the NZD has been rising over the past decade.
The NZ sits this morning at 0.7320, only a touch weaker relative to the NZ close and down about 0.4% relative to the weekend close. It lost some ground, alongside other commodity currencies, after recovering to as high as 0.7350 earlier this morning.
Of the other majors, GBP has lost a little ground, about 0.3% against the USD, after its inexplicable strength on Friday, while EUR and JPY are flat. The next focus for the majors will be the ECB meeting on Thursday night. A Bloomberg survey shows that respondents are split on whether officials might drop a pledge to boost quantitative easing if needed. We think the Bank will remove that pledge, taking another small step along its path of policy normalisation. Reuters has previously cited unidentified officials as saying the bank is keen to keep asset purchases open-ended. The debate suggests that there is some potential for EUR action later in the week. NZD/EUR is trading close to its session low around 0.6375.
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