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BofJ changes signals. The NZD awaits the RBNZ and Aussie data

Currencies
BofJ changes signals. The NZD awaits the RBNZ and Aussie data

By Kymberly Martin

Most currencies have strengthened against the USD, with the JPY being the strongest performer.

Overnight, equities enjoyed a rebound while US bonds experienced a modest further sell-off. The Euro-Stoxx 50 closed up 2.0% while the S&P500 is currently up 1.2%.

In the absence of key US data releases or Fed rhetoric the USD traded in the background overnight.

Instead the focus fell on the JPY. While the currency had ignored stronger-than-expected JP machine orders earlier in the day, it was catapulted higher by comments from Bank of Japan Governor Kuroda yesterday evening. He said its “hard to see yen real effective exchange rate falling further”, amidst quite a lengthy discussion of the currency.

This is a change of tone from a Bank that had previously been seeking a weaker currency. The BoJ may feel that, at USD/JPY 125.00, currency depreciation has gone far enough. Following the comments yesterday afternoon the USD/JPY plunged from 124.60, to settle around 122.60 in overnight trading.

The GBP/USD has also moved higher overnight, assisted by stronger-than-expected UK industrial production data. The data was not as strong as the headline appears given underlying softness in manufacturing production. Still, that did not deter the market. The GBP/USD has risen from early evening lows of 1.5370 to trade at 1.5530 currently.

NZD and AUD both pushed higher overnight in fairly choppy trading.

The NZD/USD and AUD/USD have pushed up to 0.7200 and 0.7760 respectively ahead of the key event risks for the currencies this week. This morning’s RBNZ meeting will be followed by the release of the AU employment report.

As we have previously highlighted, with market pricing for today’s RBNZ meeting hovering around 50/50, expect a sharp NZD response whatever the outcome. We anticipate a knee-jerk pop higher in the event the RBNZ does not cut today (our central view). Longer-term we still believe that fundamentals such as lower commodity prices and relative growth differentials will lead to a lower NZD.

Moves in the NZD/JPY have also been notable over the past 24-hours. The cross gapped lower yesterday afternoon after the Kuroda-inspired strengthening in the JPY. From 89.00 the NZD/JPY traded as low as 87.80 before recovering overnight to trade around 88.30 at present. We see the NZD/JPY trading in the high 80s to low 90s for the remainder of the year.


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Kymberly Martin is on the BNZ Research team. All its research is available here.

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