Underwhelming US CPI data triggered a weaker USD and kept downward pressure on bond yields, alongside ongoing US-North Korea political tensions.
US equities ended the week on a flat note taking the cumulative fall for the week to minus 1.4%, the worst performance since March, not helped by Trump continuing to talk tough on North Korea and threatening military action. Trump warned that US military resources were in place, “locked and loaded,” should North Korea “act unwisely”. The VIX index rose to above 17, its highest level this year, before closing the week at 15.5, still up a hefty 55% for the week.
But the focus for the day was on US inflation data, which continued their soft run. At 0.1% m/m, the core CPI undershot market expectations for the fifth consecutive month and taking the five-month gain in the index to its weakest run since 2010.
The data triggered broadly-based USD weakness, with the various indices down in the order of 0.3-0.4%. Key technical support levels for DXY and BBDXY remain close and, while they have yet to be broken, are,vulnerable to any further USD-negative news.
The NZD/USD closed the week at 0.7315 while NZD/AUD closed around 0.9270, both cross rates recovering back to levels preceding Assistant Governor McDermott’s “threat” of currency intervention. As we noted last week the intervention comments made no sense to us but equally it didn’t make much sense for the market to react to them either. The comments simply generated some increased volatility in the NZD, something the Bank is meant to be trying to avoid in its pursuit of price stability.
The RBNZ would do well to take a leaf out of the RBA playbook. Governor Lowe in his testimony to lawmakers said that the Bank was not prepared to intervene at the moment, “we are prepared to intervene in extreme situations but they have got to be pretty extreme”. On rates, Lowe indicated that market expectations of an interest rate hike some way down the track were reasonable. There was no notable market reaction to his testimony.
The NZD was up on all the major cross rates (mostly 0.2-0.5%) unwinding some or all of the fall after McDermott’s intervention comments.
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