Consensus indicates RBA has left its powder dry to do more cuts; NZ$ hits 3½ year highs against A$

By Mike Jones

NZD

The NZD/USD has shed a little over ½ cent over the past 24 hours, dragged lower by a weaker AUD in the wake of yesterday’s surprise RBA rate cut.

Notably, the NZD/AUD has been unable to sustain its post RBA gains. After leaping to 3½ year highs around 0.8350, the cross now trades closer to 0.8300.

The AUD has been the weakest performing currency over the past 24 hours.

Not only did the RBA’s 25bps cash rate cut (to an all-time low of 2.75%) surprise the consensus, but it appears the RBA has left its powder dry to do more.

Indeed, investors have latched onto the line that only “some” on the Board’s scope to ease has been used.

So the easing bias remains, and OIS markets have dutifully responded by pricing in another 60bps or so of further RBA easing.

This looks too much to us (our NAB colleagues forecast one more 25bps cut in June), so we are not rushing to revise lower our AUD forecasts.

Rather, we look for support around 1.0115 to hold. This has not been tested yet, with overnight AUD/USD losses only extending as far as 1.0160 (from 1.0240 prior to the RBA).

The RBA’s cut was of course a boon for the NZD/AUD. Three-year highs around 0.8350 were soon tested in the wake of the decision as NZ-AU interest rate differentials crept back into positive territory.

Notably, the increase in rate spreads has seen the NZD/AUD ‘fair-value’ range implied by our short-term valuation model increase to 0.8100-0.8300.

This supports our view that the cross is not about to race away to the topside. We look for a near-term pause in the uptrend, before a kick up to 0.8500 later in the year.

The overnight currency market session was pretty much devoid of excitement. If anything, a slight ‘pro-risk’ tone prevailed.

So the fact the NZD/USD ground lower through most of the evening seems to be more a reflection of some ‘catch-up’ to the AUD rather than any change in global fundamentals.

Looking ahead, the RBNZ’s Financial Stability Report (due at 9:00am NZT) is usually ignored by the NZD market.

But heightened interest in the Bank’s new macro-prudential tools may see more attention on the FSR than usual.

There’s also Chinese trade data and an appearance from RBNZ Governor Wheeler in front of the F&E Select Committee at midday to keep an eye on.

We’ll also be watching to see if the RBA’s rate cut weighs on the NZ swap curve this morning. If it does, the NZD/USD may struggle to regain an 0.8500 handle this week. Near-term support is eyed at 0.8390.

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Majors

Aside from all the RBA excitement, it’s been a fairly dull start to the week in currency markets. Most of the major currencies simply chopped around inside their recent ranges overnight.

Despite a weak ‘risk-on’ tone, the AUD and NZD were clear underperformers.

Some saw-tooth price action in EUR/USD did spur a bit of volatility in the USD. Early in the night, a surprise increase in German factory orders (2.2%m/m vs. -0.5% expected) sent the single-currency higher.

The fact Portugal managed to successfully issue government bonds for the first time in three years probably also bolstered sentiment towards the EUR.

However, it wasn’t long before the ½ cent EUR/USD bounce to 1.3130 was reversed. It’s hard to pinpoint an exact catalyst for such, but a late decline in European stocks likely played a role.

The Eurostoxx 50 closed up 0.7%, having been up close to 1.0% earlier in the session. In our view, the recent dovish about face from the ECB means EUR/USD sellers will continue to emerge on bounces towards 1.3150.

It’s worth noting, we have not (yet) changed our AUD forecasts in response to yesterday’s surprise 25bps rate cut from the RBA.

Prior to yesterday, our forecasts for the AUD/USD were 1.03 in Q2, 1.02 in Q3 and 1.01 by year-end.

While the risk is that these rates will be realised a little sooner than expected, we do not see a case for the AUD ‘falling out of bed’. 

Allowing for another quarter-point rate cut in this cycle (against the 60bps now priced in), and some further softening in AU commodity prices, we still see ‘fair value’ for the AUD/USD above parity.

So, while we acknowledge risk of a move into a modestly lower trading range, we are not rushing to revise our current forecasts lower. 

Rather, we look for the 1.0115-1.0625 trading range of the past 10 months to remain intact for the time being.

Looking ahead, a dearth of market moving news/events should keep currency markets in consolidation mode tonight. The USD index looks set to remain hemmed inside the familiar 81.90-82.50 range.

Other news:

*French industrial production data undershoots analyst expectations in March (-2.5%y/y vs. -1.4% expected).

Event Calendar:

8 May: NZ RBNZ FSR; CH trade balance; EU German IP; US Fed’s Stein speaks;

9 May: NZ HLFS; CH CPI; AU employment; UK BoE meeting, and industrial & manufacturing production;

10 May: AU RBA SoMP; G7 finance ministers/central bankers meet; US Fed’s Evans, Bernanke, and George speak.

All its research is available here.