NZD recovering from post RBNZ losses; AUD leaking lower, many analysts expecting RBA rate cut next week, US jobless data at lowest point since 2000

By Raiko Shareef

The USD attempted to regain some composure overnight, keying off a softer JPY and AUD. But the relentless upward pressure in EUR has stifled a broad-based USD recovery.

NZD has taken back nearly half of its post-RBNZ losses.

The AUD leaked lower through the session, giving up about half of its early-week gains. It remains sensitive to the speculation around next week’s RBA rate decision.

The past two weeks have seen significant paring of RBA rate cut bets, even though analysts overwhelmingly expect a cut next week.

Our NAB colleagues are in the minority expecting no change, but judge it to be a very close call. Yesterday saw a sharp fall in Australian interest rates, with attention on an Australian press article calling for a rate cut.

Elsewhere, the Bank of Japan kept its policy settings unchanged, but marginally downgraded its growth and inflation forecasts.

We remain wary that the BoJ could be spurred into further easing later this year, should inflation continue to wallow around zero. We look for USD/JPY to hit ¥125 by year-end.

Amid the swathe of US data released overnight, it was the weekly jobless claims number that garnered the most attention. Initial jobless claims fell to 262k, the lowest level since 2000.

With investors now giving up on Q1 as a clear soft patch, attention turns to the first readings on Q2. Encouragingly, the Chicago PMI for April, released overnight, punched well above expectations.

But an unstoppable EUR retracement higher put paid to broad USD gains. The annual rate of inflation remained stable in the euro-zone last month, having declined 0.1% in March. But more importantly, German bond yields continue to surge. EUR/USD is up 1.0% to 1.1230.

The RBNZ’s tilt to a conditional easing bias should have surprised no one who took note of Assistant Governor McDermott’s speech last week, right down to the comment that recent NZD strength is seen as “unwelcome”.

But clearly some investors (we suspect mostly offshore) were caught off guard by the change in tone. NZD/USD promptly shed a cent to 0.7600, where it has found sticky support.

Some of the downward pressure could be attributed to Fonterra’s surprise downgrade to its 2014/15 milk payout forecast, from $4.70 kg/MS to $4.50. The downgrade means that already very tight cashflow outlook for NZ dairy farming in 2015 just got even tighter.

Looking forward, absent a sharp recovery in the USD, we expect NZD/USD to hold a 0.75 – 0.78 range over the near-term.

Today, China’s official PMI outturn and the US ISM reading for April will be highlights. We also hear from the first Fed speakers in the wake of yesterday’s FOMC decision.