Opinion: Currency markets watching QSBO and RBA

By Danica Hampton Currency markets began the week trading within familiar bands, as analysts and traders alike mull the next move of significance. For the NZD this means we open the day just above the US 63 cent level, having tested the support are of 0.6250/0.6275 and respected it. There was some noted demand from onshore customers and offshore real money accounts that stymied the bumper chasers of the leveraged community that have top and tailed the market swings of late. The Asian afternoon was dominated by attention on EUR redemption worries, which were felt across the broader FX market. Just as the NZD analysts highlight a busy calendar of maturing eurokiwi and Uridashi issues, the EUR has a similar conundrum of maturities & coupons that could weigh on the EUR performance at times in July. Once again there's media attention on various financial officials: German and Indian ministers this time, who have grabbed headlines with discussion about the reserve currency role of the USD in the future. We still believe that this week's meeting of the G8 will steer clear of any meaningful analysis of the status of the USD, with issues involving North Korea & Iran being of immediate concern. Yesterday the RBNZ published a note on "NZ Bank Funding Costs and Margins". It's a succinct and well-presented analysis, albeit confined to marginal, rather than average (cost of funds), pricing. The RBNZ note illustrates how complex the issue is, with a conclusion that retail fixed rates seem reasonable but that floating rates appear on the high side. The Bank also references the changes it intends making regards liquidity policy - but saying this should not cause too much greater funding costs, as NZ banks have already been moving in the direction of the Reserve Bank's latest formal recommendations. We expect today's QSBO to have shaken off March's fear, but we believe its substance will simply be less negative. We know it will look substantially better than the previous one. But then the previous survey was taken back in March - in the heart of world economic darkness - and so was understandably the worst NZ business survey in at least four decades. The big question for the June QSBO, therefore, is not has it recovered but has it recovered enough? We're not so sure it has, and certainly not in the right areas. So an improvement in QSBO headline confidence, from the -65 seen in Q1, looks probable in today's update. Signs of stabilisation in activity will likely be echoed, too. Of many of the underlying indicators, we're more inclined to believe things will look very weak, still. Firms are miles away from even breaking even - such is the story of the NBBO - and we suspect QSBO profit expectations will look dismal, albeit probably lifting from the near all-time lows of late. We're also not convinced we'll see clear signs that investment and employment intentions are stabilising, believing things will probably continue to look very shaky on this front. Consumers meanwhile, appear relatively chipper, with confidence supported by an improving housing outlook, falling core inflation and a further boost to disposable income from April's tax cuts. On the day we reiterate levels mentioned yesterday, support in the first instance between 0.6250/0.6275 and anticipated resistance pegged at 0.6350/0.6375. Both the RBA today, and the BOE later this week will be watched with some caution by analysts to see if there is any expansion of easier monetary policy. For the RBA this would be in their statement as no rate change is expected. For the BOE there is some risk of an expansion to QE that is prescient in traders' minds. Overnight in the countdown to this week's G8 meeting, the release of monthly ISM Non-Manuf at 47 (f'cast 46) from the USA has passed with little impact on markets. ________________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.