by Raiko Shareef
NZ Dollar
The NZD slid along with other major currencies against the USD overnight, with NZD/USD 0.3% lower at 0.8650.
The weakness stemmed from a US inflation report that provoked some greater expectation of a less dovish US Fed.
On the crosses, the only notable move was against the AUD, which suffered from a slightly more downbeat set of RBA Minutes (see Majors). NZD/AUD is 0.4% higher at 0.9270. Incidentally, this saw us close out our long NZD/AUD position, established at 0.9090 on 5 June ahead of the RBNZ (Fade NZD/AUD Weakness Into RBNZ June Meeting). Our take-profit level was 0.9260.
Note that the NZD briefly sought to ping higher on a price bounce at Fonterra’s Global Dairy Trade auction early this morning. The GDT Price Index rose by 0.8%, the first increase following 8 consecutive declines, though on notably lower volumes.
NZD/USD popped 15 points higher before that was quickly reversed. Perhaps a sign that the post-RBNZ rally is running out of steam, but we’d be wary of taking a firm position ahead of the Fed tonight (NZD negative?) and NZ Q1 GDP tomorrow morning (NZD positive?).
Today’s Balance of Payments report shouldn’t cause too many waves ahead of the more important risk events outlined above. We and the market both expect NZ’s current account deficit to shrink further.
Ahead of the Fed, NZD/USD will struggle to break out of the 0.8630-0.8700 range it has kept to this week.
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Majors
The USD was ascendant last night, as signs of burgeoning inflationary pressure put investors on guard for the Fed’s policy meeting tonight.
In the monthly US CPI report for May, core inflation (excl. food and energy) was seen to rise by 2.0% y/y, up from 1.8% in April. Markets had expected a nudge higher to 1.9%.
It is true that the Fed pays less attention to this inflation measure than one derived from personal consumption expenditure (PCE). But core PCE is also climbing, from 1.1% to 1.4% from February to April, with the May reading due late this month. In fact, even as Fed Chair Yellen projects a ‘lower for longer’ message, nearly every measure of prices in the US has ticked higher: PPI, CPI, PCE, ISM, and the NFIB small business survey.
Little wonder then, that analysts think that the market is unjustifiably sanguine on the prospect of Fed tightening. A Bloomberg poll released overnight showed that more than half of 56 economists believed that futures prices are underestimating the pace of tightening over the next two years. The market is currently pricing the Fed Funds Rate at 0.77% by end-2015.
By contrast, the Fed’s own projections (published in March) suggested 1.0% by the same point. Given the upward surprise in inflation data since then, it seems likely the Fed’s projections will be upgraded at tonight’s meeting.
Understandably, the US Dollar Index is 0.2% higher at 80.6 this morning, with a broader measure of USD strength (BBDXY) even stronger. Of note, emerging market currencies continue their recent slide, but perhaps more on the back of expectations of tighter US monetary policy rather than any fresh news from Iraq.
Elsewhere on the inflation front, UK CPI fell further than the market expected, with core CPI slipping from 2.0% to 1.6%. A milder slide to 1.7% was anticipated. But investors shrugged off an initial GBP selloff, instead pointing to BoE Governor Carney’s recent hawkish comments as reason to buy sterling. GBP saw the smallest loss against the USD overnight amongst the majors, slipping just 0.2% to 1.6960.
In contrast, the AUD was the worst performer, keying off slightly more pessimistic language in the RBA’s June Minutes. The phrase that seems to have resonated most was "Low interest rates were working to support demand, although it was difficult to judge the extent to which this would offset the expected substantial decline in mining investment and the effect of planned fiscal consolidation…”
Our NAB colleagues expect the RBA to remain at 2.5% until late-2015. AUD/USD is 0.7% lower at 0.9340.
Tonight, the only game in town is the Fed. The Bank of England Minutes would be lucky to get a second look.
Other news:
*German ZEW expectations 29.8 vs 35.0 exp.
*US housing starts -6.5% m/m vs -3.9% exp.
*US building permits -6.4% m/m vs -0.9% exp.
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