Wheeler will not be pleased with currency markets. TWI and OCR expectations now in a circular process

Wheeler will not be pleased with currency markets. TWI and OCR expectations now in a circular process

By Kymberly Martin

Overnight, the EUR has given back some of its recent gains against the USD.

The AUD and NZD have outperformed.

The surge in the NZD/USD after the RBNZ’s meeting was a bit of a surprise, given the Bank delivered on a rate cut that was only 50% priced ahead of the meeting.

However, the move makes sense in the context of the market focusing on the RBNZ’s forward-looking intentions, rather than yesterday’s action.

The Bank’s statement clearly articulated a view we have held for some time, that it will be very reluctant to cut the cash rate below 2.50% (though willing if absolutely necessary).

The NZD/USD has held onto its gains overnight, trading at 0.6760 this morning.

The Bank will not be pleased with the currency’s response.

Yesterday it made very clear it is not comfortable with the currency at current levels and believes the NZD needs to weaken to help balance the economy. RBNZ Governor Wheeler said however “let’s see what the NZD does in the new few days”. For now it appears pretty firm. Near-term NZD/USD resistance is eyed at early-month highs of 0.6690.

We are back to the circular process of watching the NZ TWI and OCR expectations.

The NZ TWI, at 73.30, is now 6% above where the RBNZ projects its average will lie in Q1 next year. Continued strength, especially if combined with a harsh impact from the El Nino weather pattern, could provide the necessary conditions to get the RBNZ over its high hurdle for further rate cuts.

The AUD also surged yesterday after the release of the AU employment report. The headlines were much stronger than expected and many analysts concluded too good to be true, partly due to sampling issues. Still the trend for the labour market appears to be improving. It strengthens our NAB colleagues’ view that the RBA will not cut rates further, rather holding its cash rate at 2.00% throughout 2016. The AUD/USD now trades at 0.7300, having consolidated overnight after its initial spike higher.

The USD strengthened against a softer EUR overnight, while the GBP experienced some volatility around the Bank of England’s meeting. But the Bank stuck closely to its script, saying low oil prices and subdued wage growth would keep a lid on inflation, limiting any urgency to raise rates. Having traded a wide range around the meeting, the GBP/USD has returned to trade at 1.5170.

Today there are a handful of NZ data releases to look out for, including the November BNZ manufacturing PMI. Recall, in October it was at the respectable level of 53.3.

Tonight, US November retail sales data has the greatest potential to impact on sentiment toward the USD.


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

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