NZD tops the leaderboard again, after the RBNZ left rates unchanged and supported by a tailwind for commodity currencies; global rates are higher, with European rates bouncing off record lows

The NZD tops the leaderboard again, after the RBNZ left rates unchanged and supported by a tailwind for commodity currencies. Global rates are higher, with European rates bouncing off record lows.

Yesterday, the RBNZ left the official cash rate unchanged at 1.5% and the policy bias was made clear in the statement: “given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time”. The language in the minutes of the meeting was even stronger, with members agreeing “that more support from monetary policy was likely to be necessary”.

The unchanged rates decision and tone of the Statement were very much in line with expectations, so the market reaction was restrained. We noticed some economists brought forward their expected timing of the next rate cut from November to August, encouraged by the explicit easing bias outlined by the RBNZ. Still, swap rates nudged higher after the announcement as 5bps of easing had been priced in for the meeting.   The 2-year rate ended the day 2bps higher at 1.33%, while the 10-year rate rose by 1bp to 1.75%. Another rate cut in August looks like a good bet, albeit data dependent.

Ignoring the algo-driven spike down in the NZD below 0.66 (one financial service misreported the outcome as a rate cut), the NZD nudged higher after the announcement and has trended higher in overnight trading, marking the eighth consecutive daily increase. The charts show technical resistance around the 0.6680 mark, where it sits this morning.

The rise in the NZD hasn’t all been about the RBNZ, as other commodity currencies have also outperformed.  Both the AUD and CAD are up about 0.4% for the day.  The AUD rallied to as high as 0.6995, before peeling off. Supporting the move up in commodity currencies, oil prices are up 2-3% after US data showed a big decline fall in crude inventories.

The USD indices are flat for the day.  US economic data showed soft headline durables goods orders, weighed down by a lack of Boeing aircraft orders, while the core measure increased by slightly more than expected. The advance estimate of the trade deficit showed a widening, which will negatively impact Q2 GDP figures.

President Trump gave a wide-ranging interview on Fox news where he seemed to try to agitate as many people as possible. The FT leads with Trump’s tirade against EU regulators for their aggressive pursuit of antitrust cases against US technology groups.  He labelled Vietnam an “abuser” for allowing Chinese goods to circumvent US tariffs by re-routing goods through that country, a story which leads the WSJ this morning. On the upcoming meeting with President Xi, Trump noted his “plan B” to impose more tariffs on Chinese imports if he doesn’t like what he hears from Xi, suggesting an initial rate of 10%, rather than 25%. And he took another potshot at the Fed, saying Chair Powell was “not doing a good job” and that their policy was “insane”.

EUR and GBP are little changed at 1.1370 and 1.2690 respectively, while USD/JPY is up 0.6% to 107.85, against a backdrop of higher global bond rates.  This sees NZD/JPY break up through the 72 mark.

European 10-year rates are around 3-4bps higher from record lows set yesterday. US rates are higher, led by the belly of the curve, with some indigestion evident at the 5-year Treasury bond auction. The US 5-year rate is up 7bps, while the 10-year rate is up 6bps to 2.04%.

In the day ahead, the ANZ business outlook survey is likely to continue to remain fairly subdued.  Our anecdotal evidence doesn’t point to any bounce-back in business confidence following the RBNZ’s May rate cut and NZ’s PMIs for manufacturing and services have warned about waning growth momentum for some time.

Global economic releases tonight aren’t expected to be market movers, ahead of the important Xi-Trump meeting at the end of the week.