Nikkei Index falls 6.35% as market questions BoJ's commitment to further stimulus

By Kymberly Martin


The NZD/USD climbed along with the AUD/USD overnight, to sit around 0.8040 currently.

The NZD’s pullback in response to the RBNZ meeting yesterday proved short-lived. Despite falls in the NZ TWI in recent weeks we were not surprised that the RBNZ continued to comment on the NZD as being ‘overvalued’.

However, at 74.40 the TWI is now some way below the RBNZ’s forecast average for the year ahead, above 77.00. This is not to criticise the forecast (we maintain a similar forecast).

However, it shows within the Bank’s framework, if the NZD does not rebound aggressively, it may have some leeway to respond to other pressures in the economy that may represent inflation risk further down the track. For now, the RBNZ has left its implied interest rate track virtually unchanged.

On the RBNZ announcement the currency’s knee-jerk response was to fall from close to 0.8000 to around 0.7940. However, it soon stabilised, and overnight it rose on the AUD’s coattails, to sit around 0.8040 currently.

The NZD also continued its rebound relative to its European peers. The NZD/GBP has made steady gains from around 0.5040 to above 0.5120 currently. A similar trading pattern was shown for the NZD/EUR that now sits around 0.6020.

The net result of yesterday’s RBNZ meeting and AU employment report was a bit of volatility in the cross, within a general downward trend.

The NZD/AUD sits around 0.8370 currently. The cross currently appears to be in a consolidation phase marked by resistance at 0.8460 and support around 0.8280.

Ultimately, we see a stronger cross as NZ fundamentals prove stronger than their cross-Tasman counterparts. We maintain an end-year target of 0.8900.

Today, the BNZ PMI is released. We would expect this to confirm the story of fairly broad-based expansion in the manufacturing sector, as shown by last months’ reading at 54.5.


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The JPY, AUD and NZD have been the notable outperformers over the past 24-hours.

Overnight, in the backdrop of only limited data flow, our risk appetite index (scale 0-100%) stabilised around 60%. European equities were fairly flat as were proxies for credit spreads.

Following the release of better-than-expected headline US retail sales data for May (0.6%m/m vs. 0.4% expected) the S&P500 has managed to climb 1.2%.

While the USD index dabbled sideways around the 80.80 mark, currency moves were greater elsewhere. The JPY has strengthened 1.20% relative to the USD over the past 24-hours.

This is consistent with its current strong negative correlation with Japanese equities indices. The Nikkei fell a further 6.35% yesterday.

The market appears to be questioning the Bank of Japan’s commitment to further stimulus. In this regard the release of the May BoJ minutes today may be insightful.

The AUD was also the star performer overnight, extending its recent rebound. Yesterday afternoon, the market seemed unsure how to respond to the AU employment report. Employment headcount was essentially unchanged in May.

The unemployment rate declined to 5.5% from an upwardly revised 5.6% in April. The sub-text of the report however was softer than the headlines might suggest.

Be that as it may, the report did not add urgency to the case for the RBA to ease again at the July meeting. Currently the market prices around a 30% chance of cut at that meeting, and prices 40bps of cuts in the year ahead.

After some short-term volatility around the data release the AUD/USD then tracked sideways until the late evening. It then launched an assault on the 0.9600 level where it now sits.

Despite some intra-night volatility European currencies are now sitting at similar levels to where they were yesterday morning. The EUR/USD and GBP/USD remain close to their highs since February at 1.3340 and 1.5690 respectively.

Tonight, the final reading of Eurozone CPI will be released, which should show core inflation in the region at a fairly benign 1.2%y/y. The quarterly Eurozone employment report will also be released.

Tonight, the US will release industrial production data and the June University of Michigan consumer confidence survey.

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