Fed intends to stick to its gradual rate rise path “for now”; US equities are higher on the day and the USD stronger; NZD is the top performing currency over the past 24 hours

By Nick Smyth

In his semi-annual testimony to Senate, Chair Powell said that the Fed intends to stick to its gradual rate rise path “for now”.  US equities are higher on the day and the USD stronger but bond yields are little changed.  Politics continue to weigh on the GBP, although the Government narrowly avoided defeat on a pro-EU amendment to the Trade bill.  The NZD is the top performing currency over the past 24 hours after a surprise increase in the RBNZ’s Sectoral Factor Model of underlying inflation. 

The NZD is slightly higher than this point yesterday at 0.6785 but it is the strongest performing currency in the G10.  Headline CPI data released yesterday morning showed a 0.4% increase in Q2, slightly below the median expectation of 0.5%, but allaying some market fears of a very weak print.  There was a very short-lived dip in the NZD on the release but it subsequently recovered those earlier losses.  But the big surprise was an unexpected increase in the RBNZ’s Sectoral Factor Model of underlying inflation which was released at 3pm.  The Sectoral Factor Model showed an annual underlying inflation rate of 1.7% in Q2, higher than Q1’s 1.5% (subsequently revised to 1.6%).  After revisions, the Sectoral Factor Model now shows an increase from 1.4% in Q3 last year to 1.7% currently – still below target, but now giving the impression that it is certainly moving in the right direction. 

After initially failing to react much to the core inflation release, the NZD powered up from 0.6770 to 0.6840 while the NZD/AUD moved from 0.9140 to 0.92.  The rates market reaction was also swift, with the market completely eliminating the (10%) pricing of rate cuts in the short-end of the curve and swap rates moving higher.  The 2 year swap rate rose 4bps while the 10 year rate ended the day 6bps higher.  With the market having been more focused on the risk of a negative surprise to the CPI data and the risk the next move in the OCR could be down – and positioned accordingly – the Sectoral Factor Model provided a major surprise. 

The NZD has since drifted back overnight from 0.6840 to 0.6785 amid broad-based USD strength – the Bloomberg dollar index is up 0.4% on the day – but it has retained most of its gains on the crosses.  The Global Dairy Trade auction overnight showed a 1.7% fall in the broader index, which was within the -1% to -4% range we expected, while whole-milk powder prices rose 1.5%.

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