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Monetary policy easing, high interest rate differentials and bouyant soft commodity prices should see NZD/USD track higher

Currencies
Monetary policy easing, high interest rate differentials and bouyant soft commodity prices should see NZD/USD track higher

by Mike Jones

NZD

Having marched higher last week, it’s been onwards and upwards for the NZD overnight. The NZD/USD has squeezed above 0.8200 for the first time since April.

Still, it’s been a far from busy night. Once again it seems investors were more interested in the Olympics than anything going on in financial markets.

The absence of any new bad news to spoil investors’ party has seen the cheery mood of last week carry through to the new week. Global equity market sentiment remains positive, commodity prices are rising and risk appetite generally remains in good heart.

Alongside the muddling NZ economic recovery, the more optimistic global backdrop has allowed the ‘growth-sensitive’ NZD to continue to climb.

Looking ahead, the likelihood of further global policy easing, a high and rising interest rate differential, and buoyant soft commodity prices all support our long-held forecast for the NZD/USD to trend modestly higher into year-end. However, for this week, we look for some consolidation in the familiar 0.8100-0.8245 range.

It’s always hard to make much sense out of the Quarterly Employment Survey (due 10:45am) but we do use it as a cross-check on the other labour market data.

Our pick for Q2 private sector average hourly earnings is 0.9%, which would see annual wage inflation drop to 3.5% from 3.8%. But this series is notoriously volatile so we won’t be putting too much weight on the outcome.

In any case, the QES will be glossed over as local markets await the RBA meeting at 4:30pm (NZT). Analysts (our NAB colleagues included) overwhelmingly favour rates being left unchanged at 3.5%.

Market pricing is consistent with a small (15%) chance of a 25bps rate cut. The RBA has made it clear lately they are happy to sit back and assess how the recent rate cuts have affected the economy.

And the recent economic news, while certainly mixed, suggests Australian activity is holding up well overall.

The global news has been a little better as well, with policy makers showing their intent to do “whatever it takes”.

So the RBA’s language could be a little more upbeat, which may cast doubt on the 75bps of easing the market still expects. However, watch for any concern about the recent strengthening in the AUD, which may limit any positive AUD reaction on the day.

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Majors

It’s been a night of consolidation in financial markets. Most of the major currencies are modestly higher relative to the USD.

A dearth of news and thinning liquidity (the European holiday season has kicked off) has made for a quiet start to the week in currency markets.

Still, the positive afterglow from last week’s positive US jobs report and ECB’s new bond buying stance remains in place. Spanish and Italian 10-year bond spreads narrowed by a further 5-10bps overnight, spurring further modest gains across equity markets and commodity prices.

Against this ‘risk-positive’ backdrop, the safe-haven USD remains under downward pressure. The AUD/USD and EUR/USD have eeked out new highs above 1.0590 and 1.2440 respectively, but conviction is generally lacking.

In contrast, the GBP has started the week on the back foot. This may well continue as we head into Wednesday’s Bank of England Inflation Report.

The BoE’s growth and inflation forecasts are expected to be slashed, paving the way for a possible rate cut in September. Given this, we think EUR/GBP is poised to climb even higher, having established a base around 0.7800.

The week ahead doesn’t look nearly as action packed as last week. The European calendar is particularly quiet. The absence of any bad news may allow the risk positive mood to continue, underpinning the majors currencies around the current multi-month highs.

Central banks remain in focus. After the RBA today, Fed chairman Bernanke speaks twice. However, the speech topics are fairly bland and we’re unlikely to learn anything new given the update last week.

The Bank of Japan meet on Thursday. The Japanese government has continued to ramp up pressure on the BoJ to ease, but we suspect they will hold off for this meeting, particularly following the ‘on-hold’ decisions from the Fed and ECB last week.

Other News: Eurozone Sentix Investor Confidence for August: -30.3 v -31.0 expected.

Event Calendar:  7 August: NZ QES & LCI labour market surveys; AU RBA meeting; UK IP; UK manufacturing; EU German factory orders; 8 August: NZ QV house prices; AU loan approvals; JN trade balance; UK BoE inflation report; EU German IP; 9 August: NZ HLFS employment; NZ consumer confidence; AU employment; CH CPI, retail sales, IP, and investment; JN BoJ meeting; US trade balance; US jobless claims; 10 August: NZ card spending; AU RBA Monetary Policy Statement; CH trade balance; JN IP; EU German CPI; UK PPIs.

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