NZD lost 60 pips on a soft CPI release but recovered it relatively quickly; USD was under pressure as two Republican senators said they wouldn't support the healthcare bill; AUDUSD tested its highest level in two years

By Jason Wong

There have been some significant swings in currency markets, with most of that occurring during the local trading session, with overnight trading more settled. Global rates are lower.

The USD came under pressure during the local trading session after two Republican senators said that they wouldn’t support the proposed healthcare bill that would “repeal and replace” ObamaCare.  A just-repeal possibility also looks like a no-goer as well, with the political shambles highlighting the gridlock in Washington.  Investors are taking the view that getting anything done under the current Administration – including tax reform – will prove to be too difficult and are voting with their feet, sending the USD south.   The USD fall has been broadly based, with the majors index down 0.6%, taking it to its lowest level in eight months.  To the recent run of soft US data, we can add sentiment among American homebuilders deteriorating to an eight-month low in July, according to the NAHB survey.

Earlier in the session, NZ’s Q2 CPI surprised to the downside, reinforcing the RBNZ’s stance to keep monetary policy accommodative for a considerable period.  It was a soft release overall, with core inflation measures showing little movement over the quarter. This sent the NZD down 60pips to about 0.7265, before the US political news sent it back higher and it was soon back to pre-CPI levels.  Overnight it has traded in a fairly tight range with a slight upward drift, and it currently sits at 0.7355, a level it has struggled to move beyond over the past few weeks. The GDT dairy auction showed flat pricing overall and for the key whole-milk powder product.

The RBA minutes were meant to be a non-event, but the tone was slightly more upbeat than expected and they showed some discussion on the theoretical neutral policy rate.  It was said to be 3.5%, which the market interpreted as hawkish, being well above the current 1.5% cash rate. Our NAB colleagues note that while the discussion may reflect the RBA beginning to think about where rates ultimately end up as growth recovers to potential and spare capacity in the labour market reduces, there is little indication that the Bank is close to following its global counterparts in raising rates – as Board member Harper argued recently.  Nevertheless, with the USD under pressure at the time, the AUD tacked on 1% within an hour of the release and has continued to drift higher.  It stretched to 0.7943 last night, its highest level in over two-years, and currently sits at 0.7920.  Along with the soft NZ CPI release, NZD/AUD is down 1% to 0.9290 and a long way from the 0.96 level the cross was at just two weeks ago.

UK CPI inflation in June was lower than the market expected and, alongside soft activity indicators, reduces the chance of any Bank of England tightening this year, despite the shift to a tightening bias by a majority of the MPC members.  According to OIS pricing, the odds of a rate hike this year slipped below the 50% mark.  After probing the 1.3120 level, GBP sits a lot lower at 1.3050, failing to make any headway against a soft USD for the day.  The net result of the two soft CPI releases and the tailwind from a stronger AUD, sees NZD/GBP up 0.6% to 0.5640.

Despite NZ’s soft CPI, the NZD hasn’t lost much ground against EUR or JPY.  NZD/EUR is down just 0.2% for the day to 0.6365, with the NZD riding on the coattails of a stronger AUD.  Similarly, NZD/JPY is flat at 82.4, with the post-CPI losses fully recovered.

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