BNZ's parent expects Australian unemployment to rise toward 5.7% and further RBA easing (75bps forecast)

By Kymberly Martin

NZD

The NZD was jolted around by moves in the AUD yesterday, but has returned to trade just below 0.8420.

Today, attention should return to the domestic economy with the release of Q4 CPI. Our expectation is aligned with consensus for inflation to tick up from 0.8% to 1.2%y/y.

This would take inflation back within the RBNZ’s 1-3% band, heading back toward the mid target by year-end, on our forecasts.

However, the risk to today’s reading is to the downside, in our view. A low-side reading would likely see the market inch up expectations of RBNZ rate cuts, and at least temporarily undermine the NZD.

Later in the day the key to watch will be a slew of Chinese data releases (see Majors). Positive outcomes here would likely see the NZD weaken on the NZD/AUD cross.

However, the market would be very sensitive to any disappointments, which would take its toll on both the AUD and NZD.

For now the NZD/AUD sits around 0.7980 having received a shot in the arm from yesterday’s soft AU labour force data.

In line with resumption of JPY weakness yesterday, the NZD/JPY has resumed its strength. It sits right at resistance of the past fortnight, around 75.50. The key fundamental event for this cross will now be next Tuesday’s Bank of Japan meeting (see Majors).

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Majors

In fairly buoyant markets overnight the EUR was somewhat stronger. The JPY downtrend resumed.

Markets had a fairly positive tone overnight. Our risk appetite index (scale 0-100%) remains at an elevated 83% level. Equity market on either side of the Atlantic put in positive performances.

The Euro Stoxx 50 closed up 0.60% while the S&P500 is currently holding similar gains. With around 50/500 of the S&P500 companies having now reported Q4 earnings surprise sits at +11%.

The key data contributor to sentiment last night was US housing starts. Data showed this segment of the US economy continues to recover strongly. December starts grew 12.1%m/m (3.3% expected).

Overall, trading in the USD was quite choppy with the index sitting slightly lower this morning around 79.70.

The EUR found some friends overnight. Mood toward the common currency was helped by a successful Spanish auction of its maximum target of €4.5 sovereign bonds. The EUR/USD crept back up to 1.3360. Key resistance remains at 1.3400.

The JPY downtrend resumed yesterday, as the market now focuses on the key upcoming event for the currency, next Tuesday’s Bank of Japan meeting. With expectations for easing action now high there is certainly scope for temporary disappointment at that meeting. In the meantime, the JPY/USD has traded up to its highest level since June 2010.

The AUD/USD is a little lower this morning. Yesterday’s labour force data showed a weakening trend, as expected. The unemployment rate rose to 5.4% from 5.2% previously. Our NAB colleagues expect the unemployment rate to rise toward 5.7%.

This will contribute to the necessity for further RBA easing (75bps forecast). After its initial fall the AUD/USD found support at 1.0500 overnight, returning to trade above 1.0540 currently.

Key for the AUD (and by implication the NZD) will be a slew of Chinese data releases scheduled for 3pm NZT today. Signs that Chinese growth is stabilising will help offset the widely held concerns for soft AU domestic indicators. Chinese Q4 GDP is expected to show a rebound to 7.8% from 7.4% in the previous quarter.

Tonight, UK retail sales data will be released along with the University of Michigan Confidence survey.

All its research is available here.