Opinion: NZ$ firm against Aussie$ after RBA suggests slower Australian rate hikes

By Mike Jones The NZD/USD has spent the past 24 hours trading choppily in a 0.7150-0.7230 range. Through the early part of the night, the NZD was dragged lower by the sharply weaker AUD. Yesterday's Q2 Australian GDP figures undershot the 0.4% the market was looking for (rising only 0.2%), which got the ball rolling. But it was a surprisingly dovish sounding speech from RBA Deputy Governor Battellino that delivered the real kicker for the AUD. Battellino noted that, given the widening in bank funding spreads, the 3.75% cash rate is acting more like a 4.75% cash rate. Not surprisingly, markets interpreted the comments as a clue the RBA may have less tightening to do to get rates back to a "˜neutral' setting. Near-term tightening expectations were pared back accordingly; the chances of a February RBA rate hike now stand at around 40%. With the AUD/USD dipping below 0.9000 for the first time since October, NZD/USD was dragged back towards 0.7150. In tandem with Australian developments, NZ-US 3-year swap spreads narrowed to around 330bps, from 350bps last week. However, the NZD/USD didn't stay below 0.7200 for long. Later in the night, solid gains across equity and commodity markets saw NZD/USD rebound back towards 0.7220 "“ pretty much where it started the night. The S&P500 is currently up 0.6% and the CRB index (a broad measure of global commodity prices) is 1.9% higher. Ongoing interest to buy NZD/AUD from leveraged and speculative type accounts also underpinned the NZD last night. Today's NBNZ business confidence survey should continue to signal reasonable growth in the months ahead, even if headline confidence pulls back from October's still stratospheric level. However, the immediate focus for the NZD will be the FOMC rate decision this morning. The USD has found some support recently from expectations of an earlier start to the Fed tightening cycle. As such, a more upbeat statement is expected from the Fed this morning. Should the Fed fail to deliver on these expectations, the associated USD sell-off could see the NZD/USD again test 0.7250. The USD spent most of last night dribbling lower. Markets are focused squarely on the FOMC meeting, the outcome of which is due out shortly. Through the early part of the night, sharp weakness in the AUD paved the way for modest gains in the USD. The AUD was dished up a double dose of bad news yesterday. Third quarter GDP rose only 0.2%, against expectations for a 0.4% gain. And RBA Deputy Governor Battellino delivered what was interpreted as a reasonably dovish speech. Battellino said the current 3.75% cash rate is acting more like a 4.75% rate given the widening in spreads on lending rates, and this meant monetary policy is now in a "normal range". A sharp paring of RBA rate hike expectations (the chances of a Feb hike have been reduced to around 40%) helped send the AUD/USD below 0.9000 for the first time since late October. However, later in the night the USD began to shuffle lower. Strong gains in GBP weighed on the USD following a surprise fall in UK jobless claims "“ the first in nearly two years. As a result, the UK claimant count unemployment rate held steady at 5% (against the 5.1% expected) and GBP/USD surged from 1.6250 to nearly 1.6400. US data released overnight was more or less in line with expectations. The November CPI recorded an on-expectations 0.4% increase, while both housing starts and building permits continued to stabilise in line with market expectations. The lack of any negative surprises encouraged a bit of a recovery in equity markets and commodity prices. The S&P500 is currently up around 0.6%, with the DAX and the FTSE up 1.6% and 0.7% respectively. Meanwhile, a near 3% rally in oil prices (driven by a surprise drop in inventories) led a 1.6% gain in the CRB index (a broad measure of commodity prices). The Norges Bank raised its policy rate by 25bps to 1.75% overnight, confounding the majority of analysts who had expected no change. The surprise result saw USD/NOK outperform overnight, falling over 1% to around 5.76. The outcome of the last FOMC meeting for the year is due shortly. While no change to the Fed Funds rate or the Fed's quantitative easing policies are expected, watch for some tweaking of the statement to reflect recent improvements in the US economy and financial markets. Recent moves in Fed market pricing suggest a more upbeat statement will be needed from the Fed for the USD to hold onto recent gains. On the day, we suspect the risks are tilted towards the USD giving up some of its recent strength. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.