Enough confusion in the data for the RBNZ to hold back on rate changes for now

By Mike Jones


An uneventful Friday night trading session rounded off a forgettable week in currency markets. Indeed, the 0.8175-0.8265 weekly range in the NZD/USD was the tightest in two years.

Meanwhile, NZD/USD one month implied volatility (traded in the options market) fell to the lowest level in 15 years.

The 0.8080-0.8350 range in NZD/USD has now held for almost three months. And with the currency opening the week smack in the middle of this range, momentum factors neutral, traded volumes starting to thin out, and risks to the global economy seemingly more contained (fiscal cliff worries aside), the prospects for a break out of this range before Christmas are looking increasingly slim.

However, the week ahead at least promises to be more exciting than the last. There’s plenty on the slate for NZ economy watchers. Thursday’s RBNZ Statement will be the obvious highlight.

We expect the OCR to be left at 2.5%. Given the market prices a small (~15%) chance of a 25bps cut, an ‘on-hold’ decision has potential to provide a knee-jerk boost to the currency.

In terms of the lasting NZD impact though, more will depend on the RBNZ’s forward guidance.

A sluggish local economy certainly gives the Bank reason to sound more dovish relative to September. But OIS markets have already moved to price in one full 25bps cut over the coming year. So we suspect we’ll have to see the RBNZ shift its bias from broadly ‘neutral’ to a clear easing bias for rates to rally and the currency to sell-off in a material fashion.

We see enough confusion in the data for the RBNZ to hold back for now. So, a dovish tilt from the RBNZ, yes (perhaps with a flattened interest rate track), but no indications rate cuts are imminent.

Outside of the RBNZ decision, we’re bracing for good and bad news from today’s OTI trade data. A big jump in Q3 export volumes will have to be balanced against a further 1.4% decline in the NZ terms of trade (-7.6%y/y).

More timely information on export prices will come from Tuesday’s ANZ commodity price index and Wednesday’s GDT dairy auction. We expect both to paint a picture of commodity prices consolidating their recent gains.

Across the Tasman, the majority of economists expect a 25bps rate cut from the RBA on Tuesday (83% priced in by markets).

There are also Australian Q3 GDP figures (Wed, +0.1%q/q expected) and November employment data (Thurs, -10k expected) to monitor. 

The combination of an RBA rate cut and soft Australian data should be enough for the NZD/AUD to overcome solid resistance around 0.7900 and resume its gradual uptrend.


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Weak direction from equity markets (which closed around flat) and scant economic data of note ensured Friday was another quiet session in currency markets.

Sideways consolidation was the main theme. The EUR/USD finished the week a whopping 10 pips above where it started.

The week ahead brings a packed schedule of event risk and, with it, the potential for increased volatility in financial markets.

PMI week began on Saturday with the Chinese PMI. At 50.8 (50.6 expected), this provided confirmation the Chinese manufacturing sector is firmly in recovery mode.

This is encouraging from the perspective of the global recovery and hence should support risk appetite today. European and US November PMIs, to be released tonight, are expected to hold stable. Any unexpected increases would be ‘risk’-positive.

Central banks are also in the spotlight this week. After the RBA and BoC decisions tomorrow (-25bps and unchanged expected, respectively), we get the ECB and Bank of England decisions on Thursday.

Neither is expected to touch the policy dial. However, an expected downgrade of the ECB’s growth forecasts could provide a stumbling block for the EUR on the day.

Friday’s US non-farm payrolls will be a focus for markets as usual. However, given the impact of Hurricane Sandy on the figures, investors will likely discount a weak number.

Currently, +90k is expected with the usual last minute forecast tweaks likely to be made after the ADP employment survey on Thursday.

Investors were disappointed last week with the lack of progress on US fiscal cliff negotiations. Still, market reaction to date has been subdued.

As we get closer to the year-end deadline, markets may not be so kind should negotiations continue to stall.

If a higher chance of the US falling off the cliff does start to be priced in, we’d expect support for the ‘safe-haven’ USD with high-beta currencies like the NZD, AUD, and CAD likely to underperform.

Other News:

*RBA watcher Mccrann says RBA "all but certain" to cut rates 25bps on Tuesday.

*Moody’s cuts EFSF and ESM ratings to Aa1 from Aaa in the wake of the recent French downgrade.

*Republican Speaker Boehner said says fiscal cliff talks are "at a stalemate".* German Parliament approves revised Greek aid bill.

*US personal income flat in October (+0.2% expected). *German retail sales -2.8%m/m in October vs. -0.4% expected.

Event Calendar:

3 December: NZ trade indices; AU PMI; AU retail sales; CH non-manufacturing PMI; EU final PMIs; US ISM manufacturing;

4 December: NZ ANZ commodity prices; AU current account; AU building approvals; AU RBA decision; CA BoC decision;

5 December: NZ GDT dairy prices; NZ Crown accounts; NZ construction; AU GDP; EU retail sales; US ADP employment; US factory orders;

6 December: RBNZ policy decision and statement; AU employment; UK BoE policy decision; EU ECB policy decision; US jobless claims;

7 December: NZ wholesale trade; NZ ANZ consumer confidence; EU ECB’s Draghi speaking; US non-farm payrolls;

All its research is available here.

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