Australian and Kiwi dollars benefit from commodity lift; weaker Australian CPI will raise expectations of RBA cut

By Jason Wong

There have been only modest movements in financial markets over the past 24 hours, with circa 0.3-0.4% falls in US and European equities, little change in bond yields and a slightly weaker USD from 7-month highs.

The AUD and NZD have been two of the better performers.

The AUD heads the daily leaderboard, rising by 0.5% to circa 0.7650. In actual fact, the AUD has been the best performing major currency for the month to date, even surpassing the strength of the USD, reflecting the general lift in commodity prices.

Yesterday, iron ore prices surged by the daily limit (6%) on the Dalian Commodity Exchange. And while hard coking coal prices were flat yesterday, they are up over 150% since the end of June and have generally been rising every day in fairly exponential fashion, helped by China’s self-imposed production cuts to curb pollution.

The NZD has ridden on the coal-tails of the stronger AUD and sits this morning around 0.7165, up slightly from the 0.7130 level this time yesterday morning, and close to the middle of the 0.70-0.73 range we expect the currency to trade for much of the rest of the year.  NZD/AUD sits at 0.9370.

On the data calendar, we’ll be watching the Australian Q3 CPI release this afternoon. Core inflation of 0.4% q/q, as the market expects, would be currency neutral.  Market reaction is likely to be more sensitive to a weaker, than stronger result.  A weaker outturn for the core rates of, say, 0.2% would add fuel to further RBA rate cut expectations and lead to a stronger NZD/AUD cross. With little chance of the RBA easing over coming months priced into the curve, a slightly stronger-than-expected result wouldn’t really rock the boat.

At the other end of the leaderboard, GBP is down 0.5% for the day at 1.2175, having fallen as much as 1.3% to a low of 1.2083 in the early hours this morning during a temporary bout of USD strength. The recovery occurred during the testimony of BoE’s Carney. He noted that there were limits to the MPC’s willingness to look through an overshoot of inflation. Earlier this month he had indicated a willingness to tolerate an overshoot of the 2% inflation target in favour of supporting growth.

Elsewhere, EUR and JPY are fairly flat for the day and trade this morning at 1.0890 and 104.25 respectively.

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