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Opinion: Market pricing near 80% chance of RBNZ rate hike in January

Opinion: Market pricing near 80% chance of RBNZ rate hike in January

By Mike Jones The relentless march higher in the NZD has continued over the past 24 hours. Against market expectations for a small decline, GDP expanded 0.1% in the second quarter of 2009. The just positive GDP out-turn was interpreted by investors as further confirmation that the worst of the downturn is now behind us. Accordingly, NZ interest rates pushed considerably higher and the NZD/USD soared over a cent, to poke its head above 0.7300 for the first time in 13 months. Market pricing is now consistent with a near 80% chance of an RBNZ hike in January, up from only a 50/50 chance a week or so ago. NZ 3-year swap rates have risen nearly 30bps since the start of the week and NZ-US 3-year swap spreads have pushed out to around 3.00% "“ the highest level since December last year. Nevertheless, highs above 0.7300 did not last long for the NZD/USD. Some profit taking from real money and speculative accounts saw the NZD/USD drift steadily lower over the remainder of the day and into the overnight session. The statement from this morning's FOMC meeting was interpreted as a little more upbeat relative to their last statement. The Fed acknowledged the US recession appears to be bottoming out and activity seems to be picking up. However, the Fed's announcement it is going to slow the pace of its asset-purchase scheme caused some confusion. The USD initially weakened sharply but has since rebounded back above pre-statement levels. A late spike in risk aversion following a sell-off in US equities (the S&P 500 is currently down around 1%) boosted "˜safe haven' demand for the USD, and helped cap further gains in the NZD/USD. In the near-term, we expect the 0.7300 level will remain a high hurdle for NZD/USD. Yesterday's knee-jerk reaction to buy the NZD following GDP data that was only a touch stronger than expected looked like a bit of an overreaction to us. What's more, further sharp weakness in the USD looks unlikely in the short-term ahead of the upcoming G20 meeting. For today, initial support on NZD/USD is seen around 0.7140. The USD edged higher against most major currencies overnight. Most currencies generally drifted sideways over the first part of the night as markets awaited the FOMC meeting. An exception was GBP/USD, which soared from 1.6340 to above 1.6440 following the release of the September Bank of England minutes. The minutes were interpreted as a tad more upbeat than last month. In particular, the decision to keep the size of asset purchases unchanged was unanimous this month with August's dissenters King and Miles coming back into the fold. Surprisingly, there was also there no mention the Bank had considered cutting the rate of remuneration on commercial bank reserves, something BoE Governor King had discussed in his recent testimony. The Norwegian Krone was the strongest performing currency overnight. While the Norges Bank held interest rates at 1.25% as expected, Norway's finance minister said the nation's households should prepare for higher rates in future. As widely expected, the FOMC voted to keep the target range for the Fed Funds rate at 0-0.25%. The Fed were a little more upbeat on the prospects for the US economy relative to their last statement saying "economic activity has picked up" and "activity in the housing sector has increased". However, markets were a little surprised by the Fed's decision to slow the pace of their purchases of mortgage-backed securities, such that the scheme will now extent until the first quarter of 2010. This was is in contrast to previous indications the purchases will wind up at the end of this year. The prospect of US interest rates remaining at accommodative levels for longer saw US interest rates and the USD decline post-statement. 2-year treasury yields fell around 10bps and yields on US bank bill futures were down 10-15bps across the curve. Having drifted higher through the early part of the night, the USD index fell about 0.5% in the immediate wake of the FOMC statement sending most major currencies higher. However, a late sell-off in US equities and solid support for the USD on dips have since seen the USD rebound back above pre-FOMC levels. For today, dips in the DXY index are expected to be limited by solid support around 75.90. With the FOMC out of the way, the next major event for currency markets will be the G20 meeting which gets underway tonight. Murmurings that currencies, in particular the USD, may be on the agenda should limit large moves ahead of the meeting. ____________ * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.

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