RBNZ stands guard against a frothy housing market; BoJ adopts an even more dovish stance

By Mike Jones


The NZD remains in vogue. A bout of USD bashing propped up all of the major currencies overnight. But the NZD rose by more than most.

The NZD/USD jumped a cent to 0.8430 which, along with further gains in the NZD/AUD, lifted the TWI up to a fresh 5½ year high.

The bungled delivery of the G7’s view on currency markets spurred a fair bit of volatility overnight (see Majors). The JPY was tossed around in a wide range as investors tried to figure what exactly the G7 was trying to say.

In the end, the G7’s apparent concern at Japan’s reflationary policies knocked the top off the USD/JPY, contributing to a broader bout of USD weakness. The NZD/USD was pitched from 0.8340 to almost 0.8440 in the aftermath.

Whatever the G7’s view, we expect the tailwinds under the NZD/JPY to remain in place.

NZ-JP interest rate differentials have already widened sharply, and we expect this trend to continue as the RBNZ stands guard against a frothy housing market (reaffirmed by yesterday’s REINZ data) and the Bank of Japan adopts an even more dovish stance under its new Governorship.

Dips in the NZD/JPY will be limited to support at 76.90 in our view. Our year-end forecast is 82.00.

Yesterday’s NAB Business Conditions survey for January improved slightly, with confidence up 1 to +3 and conditions improving to -2 from -5.

We contend the improvement in confidence is principally a reflection of the improved global backdrop. Australian conditions meanwhile remain below the long-run average.

Nonetheless, our NAB colleagues have delayed the timing of the expected RBA rate cut to May (from March).

Gains in the NZD/AUD overnight again stalled at 0.8170. The strength of Friday’s NZ retail sales report may well determine whether we see 0.8200 this week. We expect a strong number.

For today, there is only Australian consumer confidence on the local data calendar.

NZ Finance Minister English is also testifying before the Finance & Expenditure Select Committee at 10am. Expect the usual headlines about the NZD being ‘overvalued’.


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The USD was belted overnight, as a sharp bout of USD/JPY selling took its toll. Most of the major currencies have been swept higher as a result.

A clumsy communication effort from the G7 shook FX markets out of their early week slumber.

The official communique from the meetings reaffirmed that exchange rates should be market determined, albeit with individual countries free to pursue domestic objectives. “Disorderly” and “excessive” currency movements were once again noted as a damaging.

This was taken by the market as an implicit approval of Japan’s efforts to combat deflation and weaken the JPY. The USD/JPY pushed higher as a result, to 33-month highs above 94.30.

But it appears the market had it wrong. A G7 official later hit the newswires saying the statement was “misinterpreted”, and the G7 was indeed worried about “excess moves” in the JPY. USD/JPY nosedived from 94.30 to almost 92.00, in a move that could almost be construed as “disorderly”.

The sharply lower USD/JPY then kick-started a bout of broad USD weakness; the EUR/USD was lifted from 1.3380 to 1.3460, the GBP/USD climbed ½ cent to 1.5660, and the AUD/USD clawed its way back to 1.0320.

Looking ahead, the JPY remains subject to the headwinds from the Bank of Japan’s anticipated shift to a more aggressive easing policy.

But the G7’s shot across Japan’s bows means policy makers may begin to soften their anti-JPY rhetoric. If so, a near-term USD/JPY top may be in place around 94.50, at least until the new, more dovish BoJ Governors are installed in late March.

The GBP has underperformed lately, in part on the expectation tonight’s BoE Inflation Report will show weaker UK growth forecasts. We also expect inflation forecasts to be revised higher. Such is the UK’s predicament.

Currency markets will also be watching this afternoon’s (3pm NZT) State of the Union address by US President Obama. The speech may hold clues on whether the US economy will avoid scheduled spending cuts.

Other News:

*UK consumer prices fell by 0.5% in January, in line with market expectations and enough to keep the annual inflation rate at 2.7% for the fourth consecutive month. We now see inflation peaking in June at 3.3%yoy before it falls back to 2.5% in December 2013.

*The UN Security Council is meeting in the wake of North Korea's third nuclear conducted yesterday.

Event Calendar:

13 February: US Fed’s Plosser speaks; US Fed’s Lacker speaks; EU industrial production; UK BoE Inflation Report; US retail sales; Fed’s Bullard speaks;

14 February: NZ PMI; JN GDP; NZ ANZ consumer confidence; JN BoJ; EU GDP; G20 meeting begins;

15 February: NZ retail sales; UK retail sales; US industrial production; Fed’s Pianalto speaks.

All its research is available here.

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