By Mike Jones
NZD
Despite support from bubbly risk appetite and a weaker USD, the NZD has lost a little of its lustre. The NZD/USD has shed the better part of ¾ cent early this morning, to trade around 0.8150.
The global backdrop remains a friendly place for ‘risk-sensitive’ assets like the NZD. Indeed, global equity markets and commodity prices built on their recent gains overnight. The AUD/USD made a fresh 5-month high above 1.0600.
So the fact the NZD spent most of this morning on the back foot likely reflects a delayed reaction to some comments from Prime Minister Key last night. Key said the RBNZ has “room to move” and the high NZD “takes pressure off the RBNZ”.
Now, while some media outlets have reported Key as suggesting the high NZD provides scope for the RBNZ to cut rates, we haven’t seen any direct quotes to confirm this is the case.
Key has said before the RBNZ has room to lower rates if it has to. Indeed, this policy ammunition is a good thing if we think about the position of Europe, the UK, and US. But he didn’t expressly link the possibility of RBNZ policy loosening to the high NZD.
We certainly doubt the PM is attempting to sway the new RBNZ Governor. From this perspective, the falls in the NZD/USD look to be an overreaction.
Yesterday’s RBA statement suggested the Bank is pretty happy with the state of the Australian economy. In holding rates at 3.5%, the RBA noted growth is close to trend and core inflation is low.
All up, the statement suggested to us there is a reasonably high hurdle for additional rate cuts. So for a cut in September we'll have to see a marked deterioration in the data. Markets took the hint and scaled back the extent of expected easing over the coming 12 months (from 70bps to 55bps), underpinning the AUD yesterday.
As a result, the NZD/AUD has surrendered most of the past few day’s gains.
Today’s QV house price data will likely be ignored by the local market as investors look ahead to tomorrow’s HLFS labour market survey. We look for more NZD/USD consolidation in the familiar 0.8100-0.8245 range for today.
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Majors
The snoozefest continues. It’s been another holiday-thinned, choppy session in currency markets, with little in the way of firm trends. Nonetheless, risk sentiment remains positive overall, keeping the ‘safe-haven’ USD under downward pressure.
Over the past week or so, financial market sentiment has been buoyed by expectations of policy action from both the Fed and ECB.
Overnight, dovish comments from the Fed’s Rosengren simply reinforced these expectations, keeping the risk rally alive.
Rosengren, regarded as a dove, essentially said the Fed should bring out the bazooka again (announce QE3 and lower the interest rate on reserves).
Equity markets in Europe and the US have notched up gains of 0.6-1.7%, commodity prices are rising (led by oil), and global bond yields are edging higher (led by US Treasuries). A mixed bunch of European data was largely shrugged off (see below for details).
Against a heavy-looking USD, the EUR and AUD again edged up to fresh highs above 1.2440 and 1.0600, but have since eased off these highs.
The USD/JPY has been one of the bigger movers, climbing from 79.30 to 78.70. The fact USD/JPY is attracting solid demand on dips toward 78.20 is consistent with the recent jag higher in US-JP 2-year bond spreads.
It will also be welcomed by the Bank of Japan. Japanese authorities have stepped up verbal intervention efforts to lower the JPY recently, although we doubt the BoJ will back up its rhetoric with action at this week’s policy meeting.
Recent Japanese data has tended to print on the positive side of expectations, giving the BoJ some breathing space. Still, even with the BoJ on the sidelines, rising US bond yields may see USD/JPY break above 79.00 in coming sessions.
Other News: Italian Q2 GDP not quite as dire as feared (-0.7%q/q vs. -0.8% expected). UK manufacturing production falls 2.9% in June, the largest fall since November 2008, but a little higher than the expected 4.3% decline. This suggests that we could see a 0.1 percentage point upward revision to Q2 UK GDP next week. German factory orders slump 1.7% in June, well below expectations for a 0.8% fall.
Event Calendar: 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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1 Comments
The New Zealand exchange rate is almost completely disconnected from the actual New Zealand economy.
Most trading and raiding in NZD happens outside of New Zealand by people with no connection to New Zealand,
This trading happens when we are asleep.
The NZD is one of the most traded currencies in the world. This is sometimes excused by statements about increased liquidity and marking markets etc. None of this is actually the case. The amounts are so far ahead of what we actually need for trade itself that trade is now irrelevant.
The NZD is traded because traders can pretend to make money out of trading it. - really they are making money out of trading the USD but they need things to trade it against so the NZD falls into a basket of currencies- in a small but not insignificant way.
Every day we told why the NZD has moved by people who do not know why it has moved who have asked other people who do not know why it has moved.
In the long term we are told that it is all about the carry trade- but again that is very very small against actual total trading in the NZD.
Our entire economy is dependent of a very few traders in other countries making bets about the USD. More and more it sounds like the trades are not actually done by people at all. The costs for them to trade is nearly zero so trades can happen all the time in increments of a second.
Our tradable sector which has to use these manipulated NZD cannot make such cost free trades. Everything the tradable sector does comes with very high, very real costs attached. Transaction costs that cannot go away.
As a result of the above transaction taxes are inevitable in my view but will be vigorously resisted by those with a stake in the status quo ( not the band) .
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