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Hawkish statement from RBNZ Governor on new LVR restrictions and possible OCR hikes sees NZ$ trading higher

Hawkish statement from RBNZ Governor on new LVR restrictions and possible OCR hikes sees NZ$ trading higher

by Mike Jones

NZ Dollar

After feeling the full weight of speculative selling yesterday, the NZD/USD has since recovered all of its losses. Indeed, at around 0.8310, the kiwi currently trades about 30 pips above where it was this time yesterday.

The break below 0.8250 on NZD/USD and 0.8790 on NZD/AUD yesterday triggered a rush of NZD selling from speculative, momentum, and technical accounts. But having been squeezed down to 0.8200 and 0.8760, the NZD/USD and NZD/AUD bounced overnight.

This was despite still generally downbeat risk sentiment. Global equities markets languished in negative territory overnight as the US government shutdown entered day two. Our risk appetite index (scale 0-100%) dipped below 60% for the first time since early September.

Instead, a strong night for commodity prices (CRB index up 0.8%, oil +2%, and gold +2.2%) and another fairly dismal session for US bond yields and the USD look to have been responsible for the turnaround in NZD sentiment.

The currency also got an early morning caffeine hit from a hawkish-sounding RBNZ Governor Wheeler. An op-ed released on the RBNZ’s website around 7:30am (strange timing we know), reinforced the message that LVR limits will not be able to do all of the Bank’s heavy lifting, and 2 percentage points worth of OCR hikes will be still be required over the coming two years.

What’s more, “if the loan-to-value speed limit is unable to slow house price inflation, larger increases in the official cash rate would be required.”

For today, NZD/AUD buying in the wake of Wheeler’s speech should keep the NZD/USD fairly perky. The big overnight reversal technically paves the way for a test of the top end of the recent 0.8240-8435 NZD/USD trading range.

However, US political uncertainty will probably continue to limit the topside for now. The only data to be released in the Asian time zone of any note is the Chinese non-manufacturing PMI at 2pm (NZT). This should be positive.

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Majors

After stabilising in Asian trading yesterday, the downtrend in the USD resumed with gusto overnight. We noted yesterday that the break through key support at 80.00 on the DXY index portended additional weakness. The index plumbed fresh 9-month lows overnight.

USD/JPY selling and EUR/USD buying did most of the damage. The former remains highly sensitive to yield differentials, and so the slide in 10-year Treasury yields back to around 2.6% looks to have been mostly responsible for USD/JPY’s 0.5% decline, to around 97.50.

The push back in Fed tapering expectations has now seen 10-year US Treasury yields lose about 40bps in less than a month, eroding fundamental support for the USD. Doubts about a 2013 taper gathered pace overnight, reflecting the ongoing US government shutdown, and decidedly soft ADP September employment figures. Not only did headline employment undershoot expectations (166k vs. 180k expected), but August's gains were revised lower (to 159k from 176k). Note that the ADP figures have probably taken on even greater importance now that Friday’s non-farm payrolls figures will not be released this week.

The EUR was emboldened by a double act of: 1) a less dovish –than-expected ECB meeting, and 2) a resolution to Italian political uncertainty. On 1) the Governing Council surprised no one by keeping its main refinancing rate on hold at 0.5% and the deposit rate at 0%. But those looking for additional ECB easing were forced into a rethink after President Draghi said the recent fall in inflation was broadly in line with expectations and there were no plans for extra stimulus measures. On 2), Italian PM Letta easily survived a confidence vote (235 votes to 70) and Berlusconi gave up trying to overturn the Italian government.

EUR/USD jumped from 1.3520 to almost 1.3600 amid solid buying of EUR crosses. We’ll have to see ongoing signs of recovery from tonight’s EU retail sales and final services PMI figures to sustain the EUR’s rally.

However, US data and a string of Fed speakers will also be worth keeping an eye on to the extent they provide any direction for the USD. Note that Fed chair Bernanke is speaking this morning (8:30am NZT) but the rather bland topic (banking regulation) suggests there won’t be much in it for markets.

Other News:

*Gold prices rise 2.2%, recouping around ¾ of the previous day’s rout.

*NZ ANZ commodity export prices rise 0.9% in world terms, as expected.

Event Calendar:

Oct 3: CH non-manufacturing PMI; EU final services PMIs; EU retail sales; US factory orders; US ISM non-manufacturing index; US Fed speakers;

Oct 4: CH HSBC services PMI; JN Bank of Japan decision; US non-farm payrolls; US more Fed speakers.

All its research is available here.

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