A significant fall in the NZD yesterday after a more dovish RBNZ Monetary Policy Statement has been compounded overnight with a risk-off tone developing and emerging markets coming under pressure. The NZD is in good company at the bottom of the leaderboard alongside the Turkish lira, South African rand, Argentine peso and Russian Ruble. The yen, Swiss franc and USD have outperformed. Global rates have nudged lower while NZ swap rates reached 2-year lows yesterday.
The NZD is down nearly 2% from this time yesterday and nearly 1% since the NZ close, with the combo of a dovish RBNZ and global risk-off tone doing the damage. It sits at 0.6625, not far from the 0.6612 low posted this morning, a level not seen since March 2016. In a surprise move, the RBNZ pushed out its first projected rate hike by about one year, with the Bank looking to keep policy steady for longer. There is now no sign of a rate hike built into its projected OCR track until the second half of 2020. The Bank has clearly put more weight on the risk of weaker growth than the recent lift in underlying inflationary pressure.
Governor Orr argued that the risks to the OCR outlook up or down are balanced, although not unnoticed in the Statement were two scenarios which showed some asymmetry – the dovish scenario showing a 100bp cut would be required and the hawkish one suggesting a 50bp hike. Later in the day and after the NZ close, Assistant Governor McDermott suggested that the chances of a rate cut had increased (“we’ve been pushed nearer to that trigger point”) and that the Bank would need to see core inflation above 2% to hike.
Perhaps the biggest take-out from the announcement is the revelation of Governor Orr’s policy bias. His policy style looks more like that of previous Governor Bollard of “give growth a chance; relax about inflation”. Under that regime, inflation averaged 2.7%, well into the top half of the target range. Core inflation has recently lifted to a six-year high of 1.7%, a trend that the Bank welcomed, alongside a bias to encourage more inflation.
Considering the no-change decision and the modest tweak to the projected rate track in the distant future, the reaction in the rates market was unusually vicious. The 2-year swap traded as low as 2.02% and 5-year swap got down to 2.38%, the lowest levels in nearly two years, with one-sided positioning heading into the announcement creating a hole in liquidity. Towards the end of the day, some reversal was evident, with the 2-year rate ending the day down “only” 7bps at 2.045% and the 5-year rate down “only” 11bps at 2.41%. Ironically the market reaction, including the slump in the NZD, means that the odds of the next move being a hike has increased over the past 24 hours and, given the higher inflation outlook, the curve should steepen, not flatten. The OIS market prices in no more than 4bps of cuts through to mid-2019. We’d agree that the probability of an actual rate cut is fairly low.
The slump in the NZD has seen it break through an array of technical levels, including on the crosses, and it’ll take a few days to settle into new ranges. Ultimately, we think that the escalation of US-China trade wars and how that impacts the global outlook is a much more important factor for the NZD going forward than any nuances on the monetary policy outlook.
Geopolitical risks were the overnight theme, hitting emerging market currencies like the Turkish lira and Russian ruble, with US sanctions hitting those currencies. As noted, this compounded NZD losses and has also seen the AUD track lower, moving back below 0.74. NZD/AUD fell to a 10-month low and currently sits at 0.8965. EUR has been on the soft side overnight, with traders reporting some EUR/CHF cross selling on the risk-off move. USD/JPY is steady around 111 and NZD/JPY has slumped to 73.5 – even ignoring the daily move the trend looks ominous.
US PPI inflation came in slightly softer than market expectations, with the data coming ahead of the more important CPI release tonight, where expectations are for no change in the annual rates for headline and core inflation. Fed President Evans, a long-time dove, has turned more hawkish, indicating that the Fed might need to raise rates to a “somewhat restrictive setting” in 2020. US Treasury rates are slightly lower across the curve, with the 10-year rate down 3bps to 2.93%. US equities remain oblivious to the global risk-off backdrop and are flat for the session.
Ahead of the important US CPI release tonight, UK and Japan Q2 GDP data will be released. Today’s RBA Statement on Monetary Policy shouldn’t surprise, with RBA Governor Lowe giving a good run-down of the key issues earlier this week.
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