Incoming Australian data remains weak; BNZ's owner NAB expects 25 bps rate cut from RBA tomorrow

By Mike Jones


The NZD/USD rose to within a whisker of fresh 1½ year highs on Friday night, as optimism about the US recovery further juiced up risk appetite (see Majors).

But the big news of the week was the march higher in NZD/AUD. The cross finished the week at around 0.8120 – the highest level since July 2011.

Notably, the gains in NZD/AUD have lifted the trade-weighted NZD to 5 ½ year highs above 76.00. The net NZD selling revealed in last week’s RBNZ currency flows data suggested the Bank is unhappy with a TWI above 75.00.

Sharply contrasting NZ-AU monetary policy expectations have been responsible for much of the recent surge in NZD/AUD.

Indeed, the AU-NZ yield differential has now almost been eliminated. Incoming Australian data remains weak and our NAB colleagues expect more cash rate cuts from the RBA, including a 25bps cut this Tuesday (market pricing 22%).

In contrast, the RBNZ last week toed a less dovish line than the market had been expecting, and does not appear to be even contemplating a rate cut.

Looking ahead, the NZD/AUD will remain in the spotlight this week. While it’s shaping up as a relatively quiet week offshore, it’s anything but Down Under.

In NZ, there will be immense focus on Thursday’s HLFS labour data, given Q3’s surprising spike in the unemployment rate. We and the market expect the unemployment rate to edge back down to 7.1%.

Across the Tasman, the RBA meeting, January employment data, Q4 retail sales, and the December trade balance will keep Aussie economists on tenterhooks.

Overall, the risks of 1) an ‘on-hold’ decision from the RBA and 2) NZ unemployment not falling as expected leave us with a view we could see a modest pull-back in the NZD/AUD this week.

Note that our short-term NZD/AUD valuation model currently estimates a ‘fair-value’ range of 0.8000-0.8200. This suggests any near-term pull-backs should be limited to around 0.8000.

For the NZD/USD, last week’s bounce back above 0.8400 met our expectations and has seen our momentum model enter a fresh long position. The next key resistance level to watch is now 0.8480 (the December highs).


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The USD bounced around wildly on Friday, as markets reacted to the payrolls and ISM data.

In the end, investors decided the data bodes well for the US recovery. As a result, equity markets notched up solid gains, the VIX index (of risk aversion) dropped sharply, and the USD finished the week on a softer note.

The USD/JPY was the exception once again, rising to fresh highs above 92.90.

At first glance, the January non-farm payrolls data was disappointing. Headline employment didn’t quite match expectations (157k vs. 165k expected) and unemployment rose (7.9% vs. 7.8% expected).

But investors were happy to look through the weakness given a) positive revisions to December employment, and b) encouraging manufacturing data (US ISM and European PMIs).

The EUR/USD briefly poked above 1.3700 in the aftermath of the US data onslaught, before heavy USD/JPY buying knocked the top off the single currency.

Along with the JPY, the GBP was the other key exception to the weaker USD rule (hat tip to a weak UK PMI). As a result, EUR/GBP continued on its merry way higher.

However, at almost 0.8700 we believe the currency is a little overextended; we took profit on our long position at 0.8611.

The week ahead is fairly quiet as far as US data goes. But in Europe there will be plenty of attention on Thursday’s ECB meeting. No change in policy is expected, but the press conference will be interesting.

President Draghi will likely be pressed on how comfortable the ECB is with recent EUR strength.We doubt Draghi will try and jawbone the single-currency lower.

However, Friday’s 1.3700 highs may nonetheless represent a high watermark in the short-term given the likelihood the EU revises down its economic growth forecasts this week.  The daily RSI also suggests the EUR/USD is starting to look ‘overbought’.

Elsewhere, it’s a big week for Australian data and the AUD. Tuesday’s RBA meeting, Australian employment data on Thursday, and Friday’s Chinese trade data all have the potential to move around the AUD.

Our NAB colleagues expect a 25bps cut from the RBA, but the risk is an ‘on-hold’ decision sends the Aussie back towards 1.0500.

Other News:

*US ISM manufacturing 53.1 vs. 50.7 expected.

*European PMI 47.9 vs. 47.5 expected

Event Calendar:

4 February: NZ ANZ commodity prices; AU building approvals; UK PMI construction; US NYC ISM; US factory orders;

5 February: NZ QES labour survey; AU PSI; AU trade balance; AU RBA policy decision; CH HSBC services PMI; EU services PMI; EU retail sales; US non-manufacturing ISM;

6 February: AU retail sales; EU German factory orders;

7 February: NZ HLFS employment; AU NAB business confidence; AU employment; UK BoE policy meeting; EU ECB meeting;

8 February: AU RBA policy statement; CH trade balance.

All its research is available here.

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