BNZ's parent sees RBA's cash rate at 1%; economic fundamentals, global risk appetite & US Fed expectations dominant drivers of NZD

By Kymberly Martin

The USD has weakened overnight. The JPY has outperformed. The GBP has headed toward its post-‘Brexit’ lows. The NZD/USD is modestly stronger.

Overnight, the Euro Stoxx 50 made a solid 1.6% gain, but the S&P500 is having trouble holding on to early morning gains, now trading fairly flat.

Overall our global risks appetite index remains at a fairly solid 64%.

Despite this, the ‘safe haven’ JPY finds itself back in favour. The USD/JPY has traded down from 102.50 to below 101.90 currently. Technically, we continue to see strong support at the post-‘Brexit’ lows near the 100.00 level.

The GBP/USD was under pressure from the early afternoon, not significantly influenced by the release of soft June UK trade balance data. It traded as low as 1.2960 in the early hours of this morning, before returning to 1.3000 currently. We see potential for further downside to the mid-1.20s this year.

The AUD/USD climbed off early-evening lows to test its July-highs, around 0.7680, in the early hours of this morning. It has subsequently eased off to trade around 0.7670.

Yesterday our NAB colleagues made some adjustments to their RBA view. Their expected low in the RBA’s cash rate (1.0%) next year is now below market pricing.

However, that is the long game. Near-term, global influences and expectations for Fed (in)action will likely remain a key driver of the AUD. Today we also have a scheduled speech by the RBA’s Governor Stevens. The market will be looking to assess how much of an RBA easing bias remains. This is also the Governor’s last scheduled speech before he completes his term next month.

The NZD/USD has traded a little higher in the early hours of this morning, but currently sits only a little above yesterday morning’s levels, at 0.7150. There is little on the domestic agenda today so it will be all eyes on tomorrow morning’s RBNZ meeting. We would be surprised if its actions have any enduring impact on the NZD. Relative economic fundamentals, global risk appetite and evolving expectations for the US Fed will likely remain dominant drivers.

However, the market has come a long way in recent weeks to price almost 70bps of further OCR cuts. The risks around this meeting are therefore likely tilted toward the RBNZ not sounding sufficiently dovish relative to these expectations. The NZD/USD could gain a knee-jerk skip higher. The risk on the other side would be the RBNZ delivering a 50bps cut tomorrow. While not out of the question, we think this unlikely.

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