BoJ to take on a 2% inflation target; Abe suggests large ‘extra budget’ given the size of Japan’s output gap

By Kymberly Martin


The NZD/USD has traded fairly quietly over the past 24-hours to sit around 0.8440 this morning.

Yesterday’s domestic data provided little to disturb markets. The WDM consumer confidence survey rebounded to 111.1 (close to the long-term norm) in Q4, from 102.5 in the previous quarter.

The November PSI was solid if not spectacular at 54.1 (57.4 previously). The NZD/USD appears to be consolidating around the 0.8450 level after its recent rapid ascent. The next key domestic focus for the currency will be Thursday’s Q3 GDP and ANZ business confidence survey.

The NZD was also softer on the crosses overnight. After touching 71.50 early yesterday morning the NZD/JPY drifted off yesterday to sit around 70.80 currently.

Much attention will continue to be focused on the JPY and its crosses in coming weeks (see Majors). For now the NZD/JPY simply appears to be taking a breather from a more entrenched up-trend we suspect will take the NZD/JPY to the mid-70s.

The NZD was also a little weaker against its European peers and the AUD. Key for the NZD/AUD today will be the release of the RBA December minutes.

These should shed some more light on the recent RBA rate cut decision, and the way ahead. The market continues to price around 45bps of further cuts in the coming 12 months, which seems reasonable to us.

Early tomorrow morning the latest GDT dairy auction will take place. It is expected to show prices stabilising after their earlier steep run-up, and is unlikely to significantly impact the NZD.

Overall, we look for NZD/USD support at 0.8360 to hold this week, with a climb into the 0.8500s likely absent any negative local data surprises.


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It was a quiet start to the week for currencies.Overnight, there was little to fluster currencies markets. No further substantive progress appears to have been made in US fiscal cliff negotiations.

Both sides are starting to talk about the benefits of waiting until January to reach a deal. Our risk appetite index (scale 0-100%) remains at a healthy 74%. The USD index has held a fairly tight range in thinning pre-Christmas trading, sitting close to 79.60 at present.

There was also a lack of drama from Europe overnight. Headlines reported that Italian P.M Monti would meet with centre-left candidate for the premiership, Bersani today.

The likelihood Monti continues to play some role in Italian politics after his resignation is growing. The EUR/USD has traded sideways just above 1.3160.

Having opened the week some 75 points higher, around 84.30, the USD/JPY drifted lower for most of the past 24-hours. It currently sits around 83.80. The USD/JPY still remains at close to its high for the year as the market awaits P.M. elect Abe’s next moves.

It appears he will push ahead in instructing the BoJ to take on a 2% inflation target. He has also suggested the need for a large ‘extra budget’ given the size of Japan’s output gap, believed to be behind its deflation trend.

However, rating agency S&P has indicated it may consider downgrading Japan if its debt trajectory does not change. The next test for the JPY will be the BoJ policy decision on Thursday.

Tonight, UK ONS house price data will be delivered along with the US NAHB house market index.

Event Calendar:

18 December: NZ ANZ business confidence; AU RBA Board minutes; CH property prices; US NAHB housing index

19 December: NZ current account; EU German IFO; UK BoE minutes; US housing starts & building permits;

20 December: NZ GDP; AU RBA Bulletin; JN BoJ decision; UK retail sales; US jobless claims; US Philly Fed; US home sales;

21 December: NZ net migration; NZ credit card spending; UK public finances; US durable goods orders; US Chicago Fed index.

All its research is available here.

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