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Forward guidance on interest rates from RBNZ is what really matters

Forward guidance on interest rates from RBNZ is what really matters

by Mike Jones


It’s been a bit of a snooze-fest in currency markets overnight. After briefly poking its nose above 0.7800, the NZD/USD spent the rest of the session mostly consolidating in a tight 0.7750-0.7810 range.

More headlines, more noise. European Chatter and hearsay drove a bit more chop in currencies overnight, but the fact is everyone is waiting for the weekend’s Greek election.

A spurt higher in the EUR put the USD on the back-foot early on. And with US retail sales underwhelming (-0.4% ex-auto) the USD continued to grind lower through the rest of the session. Against the broadly weaker USD, the NZD was pushed up through 0.7800 for the first time since mid May.

It was a similar story in the AUD. Providing additional support, an unsubstantiated news story said the Bundesbank was considering diversifying some of its US$39b FX reserves into the AUD. If true, we doubt this would amount to more than 3% or 4% - and that’s contingent on there being enough Australian government bonds available to buy.

Today, all eyes are on the 9am release of RBNZ’s June Monetary Policy Statement. We expect rates to be left on hold at 2.5%, with forecast OCR hikes to be delayed until H1 2013.  The market prices a small (~15%) chance of a 25bp rate cut.

The latest global and NZ data has probably been a tad weaker than previous RBNZ forecasts. The RBA has cut rates aggressively and European tensions have worsened. While these developments help make the case for a rate cut, large drops in mortgage interest rates and a NZD almost 4% below the Bank’s March MPS expectations have eased financial conditions substantially already.

The knee-jerk currency response to an on-hold decision would likely see the NZD higher, as near-term easing expectations are priced out of the curve. But the Bank’s forward guidance on interest rates is what really matters.

Maintenance of a mild tightening bias would be a positive for the NZD, with NZD/USD perhaps testing the overnight highs around 0.7800. If rate cuts are put on the table, a heavy toll would be taken on the currency, particularly NZD/AUD. Near-term NZD/USD support is eyed at 0.7690.


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The USD slipped relative to most of the major currencies overnight in thin, range-bound trade. Fears of a European meltdown took a breather, allowing a mild short covering rally in the EUR.

Financial markets were relatively quiet overnight. Investors are becoming a little wary of taking large positions ahead of the weekend’s Greek elections. Global equity markets were a little mixed, commodity prices were either flat or down slightly, and most currencies simply chopped around inside recent ranges.

The most eye-catching development in currency markets was a strop higher in EUR, as speculative investors pared some of their recent short position. Not only did Euro zone industrial production exceed analysts’ expectations (-0.8%m/m vs. -1.2% expected), but Grexit fears took a breather. The leader of the far left Greek Syriza party said the EU won’t cut Greek aid or toss the country from the Eurozone. Reports of a possible third

Greek bailout and policy makers preparing to renegotiate the Greek bailout with the new leader also bolstered EUR sentiment.

From below 1.2500, the EUR/USD climbed to nearly 1.2600, paving the way for a broad weakening in the USD. A weak set of US retail sales figures for May (-0.4%m/m ex autos, vs. 0.0% expected) further weighed on US bond yields and the USD.

Speculation of more quantitative easing from the Fed continues to ramp up ahead of the 20 June FOMC meeting. 10-year US Treasury yields slipped from 1.7% to nearly 1.6%, dragging USD/JPY from 79.70 to around 79.30.

Looking ahead, we suspect currencies will remain fairly range bound in the lead up to the Greek election. The EUR/USD looks well hammed in the 1.2435-1.2670 range. Widening EU-US 2-year bond differentials are helping to limit the downside.

Following last night’s softer US retail sales, theses are now nearly 15bps above their recent 20 bps lows. In the short-term, the risk is for additional EUR short covering as ‘short’ speculative accounts attempt to get square ahead of the weekend.

Other news: Ratings agency Fitch reports another ECB LTRO is likely even if Greece remains in the EMU. Spanish bond yields remain around recent highs.German CPI falls 0.2%m/m (1.9%y/y), as expected.

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Days to the General Election: 21
See Party Policies here. Party Lists here.