NZD/AUD pushes higher as RBA opts for a pause in the tightening cycle. Market ignored NZ QSBO which was a very monetary policy-friendly report, with significant easing in capacity pressures

Markets have been quiet overnight with the US on holiday. The US cash market is closed and S&P500 futures are flat. Treasury futures are little changed from the NZ close. In light trading volumes the Euro Stoxx 600 was barely higher.  European 10-year rate rates are up 1-2bps, the UK 10-year rate is down 2bps.

There has been a bit more price action in other markets. Oil prices are up 2%, with Brent crude above USD76 per barrel, a delayed response following Monday’s announcement that Saudi Arabia would extend its 1m barrels per day production cuts.

In the GDT dairy auction the price index fell 3.3%, its largest fall since early April and weaker than expected. Butter and butter milk powder both showed double-digit falls, skim milk powder fell 6% and whole milk powder fell 0.4%. The weak auction is not encouraging for NZ’s terms of trade or dairy farmers’ incomes.

The weaker auction had no impact on the NZD overnight, being the strongest of the majors, against a backdrop of broad USD weakness, and up 1% to just under 0.62 after an overnight high of 0.6212. The AUD is next best, and trades close to 0.67.

Both currencies have received some support from a stronger yuan, which trades at its strongest level in about a week, with USD/CNH around 7.23. Yesterday, the PBoC continued with its policy of setting a stronger CNY reference rate. We also saw a report on Bloomberg that China’s biggest state banks are offering Local Government Financing Vehicles loans with 25-year ultra-long maturities and temporary interest rate relief. While kicking the can down the road, the immediate effect will be preventing a credit crunch in the sector, mitigating one source of risk overhanging China’s economy.

Yesterday the RBA decided to leave the cash rate unchanged at 4.1%, in line with the small majority of economists, and the market had been pricing in a modest chance of a hike in the lead-up to the meeting. The statement was less hawkish than the previous one, as is typical when it keeps rates on hold, but the Bank maintained a bias to tighten, viz “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe”. The RBA has been a real laggard compared to other dollar-bloc countries regarding the tightening cycle and its give-growth-a-chance strategy risks higher inflation becoming entrenched.

The on-hold decision only had a temporary impact on AUD/USD – a 40 pips fall lasting no longer than a couple of hours – before the weaker USD took over. A more lasting impression is evident in NZD/AUD, sustaining a 30 pips lift to currently trade around 0.9250. Likely forthcoming higher wages and CPI are expected to trigger further RBA tightening and those of us expecting a weaker cross rate will just have to be more patient.

On Australian rates, their level was drifting higher in the hours leading up to the decision so the immediate reaction was lower yields, which have only been partially sustained.  Since the decision, which coincided with the NZ close, the 3-year Australian bond future is down 4bps in yield while the 10-year rate is down less than 2bps. The market gives more chance of a hike in August than it did yesterday, with about 15bps priced for the meeting.

Domestic rates were pushed higher yesterday, a result of the previous overnight moves and higher Australian rates heading into the RBA meeting. Swaps ended the day 4-5bps higher and NZGBs were up 6-7bps.  There was no market reaction to the NZ QSBO, with global forces in charge. If the market paid attention to the release there should have been a reaction towards lower rates, given the market still prices in a better than even chance of another RBNZ rate hike, something we disagree with.

The QSBO painted a less-improved activity backdrop compared to the monthly ANZ survey and, in fact, the expected own-trading conditions indicator fell from a net minus 8% to a net minus 17%., consistent with the weak growth backdrop persisting. The value-add of the survey was the plethora of data on capacity pressures and the key ones showed a significant easing in labour market pressures and capacity ultilisation. It was a very monetary policy-friendly update, consistent with the view that the RBNZ had done enough work to make serious inroads into the inflation problem.

The calendar remains quiet in the day ahead, with China’s Caixin PMI service index and the US FOMC minutes of the June meeting, where the Fed paused its rate hike cycle but added two hikes to its projections. Enough has been heard from Fed speakers since the meeting so expectations are low for anything new to be revealed.