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Opinion: Markets picking Australian rate hike in November

Opinion: Markets picking Australian rate hike in November

By Danica Hampton NZD/USD has spent most of the past 24 hours trading choppily within a 0.7100-0.7200 range. The local currency started off the weak on a fragile footing. A sharply stronger JPY (thanks to comments from Japan's Finance Minister and repatriation flows ahead of fiscal half-year) encouraged investors to liquidate NZD/JPY positions. NZD/JPY dived from around 64.50 to below 63.50 and NZD/USD was dragged down towards 0.7100. Overnight, the JPY strength dissipated a little (Japan's Finance Minister clarified that his recent comments did not mean he endorsed a strong JPY) and a host of merger and acquisition activity saw global equities rebound strongly. Against a backdrop of recovering risk appetite, NZD/USD climbed from sub-0.7150 back up towards 0.7200.

Strong gains in the AUD/USD (it rose from below 0.8600 to above 0.8750) also helped underpin NZD/USD. While yesterday's comments from RBA Governor Stevens contained a few mixed messages, the overwhelming end result is that market participants and the media are now convinced the RBA will hike rates in November on Melbourne Cup Day. Australian market pricing is now consistent with an 80% chance of a 25bps hike to 3.25% in November and about 150bps of tightening in total over the next 12 months. (Ed. note: For more on RBA rate hike forecasts, see www.interest.com.au's rate rise calculator.) Despite the massive gains seen in global equities (European indices are up 2½-3% and the S&P500 is up 1.7%), the NZD/USD strength has been relatively subdued and the USD has remained firm. We suspect this reflects investors' growing caution on the global outlook and a general reluctance to push for further dramatic USD weakness ahead of this week's key data. It's worth noting, ECB President Trichet said "the solidarity of the dollar is very important" for the global economy. For today, expect bounces in NZD/USD to be limited to 0.7200-0.7220. Initial support is eyed ahead of 0.7110, but a break below this level will open up the downside towards 0.7060. Keep an eye out for NZ's building permits for August (due 10:45am). The USD finished the night a touch firmer against most of the major currencies. The week started off with a heavy bout of JPY demand. Comments from Japanese Finance Minister Fujii (discounting the likelihood of intervention to weaken the JPY) and repatriation (ahead of half fiscal year-end) saw USD/JPY plunge from above 89.60 to an 8-month low of nearly 88.20 early yesterday afternoon. The sharply stronger JPY encouraged investors to square up short JPY cross positions (like EUR/JPY and GBP/JPY). Heavy selling of EUR/JPY and GBP/JPY took a toll on both EUR and GBP. EUR/USD skidded from above 1.4700 to below 1.4580 and GBP/USD slipped from nearly 1.6000 to below 1.5800. However, the JPY strength didn't persist through the overnight session. Japan's Finance Minister clarified that his recent remarks on intervention did not mean he approved a strong JPY and that his comments that "past intervention was inappropriate" were made in a general sense. USD/JPY rebounded from sub-88.40 to around 89.40 as the night progressed. Recovering risk appetite and a strong performance from global equities also helped support USD/JPY. A pikc-up in merger and acquisition news (both Xerox and Abbot Laboratories are reportedly in the midst of corporate deal making) help lift equities worldwide. A revival in merger activity is another sign that business confidence is improving and the financial system is returning to normal. European indices rose 2-3% and the S&P500 is currently up 1.7%. While the recovery in risk appetite helped lift EUR/USD off its lows, EUR/USD struggled to break above 1.4680. ECB President Trichet said "the solidarity of the dollar is very important" for a sound financial system and a strong global economy. Trichet's remarks simply serve as yet another reminder that a dramatically weaker USD is not in the interests of policy makers worldwide. With global equities rebounding some 50% from the lows seen in March, and many equity indices now looking stretched relative to valuations, investors are becoming less tolerant of softer-than-expected economic data. If this week's economic news (including US Q2 GDP, non-farm payrolls, the European Commission's Survey and the UK Q2 GDP) fails to justify the upbeat global outlook currently priced into markets, look out for a correction across global equities and a recovery in the USD. We expect the USD Index will find solid support on dips towards 75.90-76.00, and suspect bounces in EUR/USD will be limited to 1.4700-1.4720 near-term. ____________ * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.

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