High-beta currencies such as the NZD
were the major beneficiaries, alongside JPY. The Kiwi got an extra boost from a strong dairy trade auction, propelling it to a 15-month high, and making NZDAUD
parity a good bet for the first time in 40 years. Meanwhile, the Aussie held onto yesterday’s gains in the local trading session today after a strong second-quarter GDP number matched expectations.
As this chart shows the odds of a rate hike in the US before the end of the year have settled back close to 50:50 after flirting with 70% last week. September looks to be a dead duck: the best dollar bulls can hope for would be a warning shot fired across across the bows of complacent markets. Onwards and upwards for the Australasian currencies then as their economic fundamentals stand out from the pack.
Global dairy prices
have jumped 40% this year as lower production in the European Union coincides with firming demand out of China. As the world’s largest dairy exporter, New Zealand
is a major beneficiary. As this chart shows, futures prices have been a good indicator of the fortnightly Global Dairy Trade (GDT) auctions and so it was again this time around. The supply-demand balance is expected to restore itself in coming months and prices will not maintain this rate of ascent. Nevertheless, falling commodity prices had been the only thing casting a shadow over the country’s economic growth rate of late and now they are turning into a positive.
Source: Bank of New Zealand
New Zealand has become a victim of its own success. Next week’s GDP update is expected to show an expansion of around 3.5% year-on-year. This level of activity, although supported by booming immigration, is above potential and in normal circumstances would put upward pressure on input costs and, in turn, the consumer price index. But, ironically, the markets are “rewarding” New Zealand for its success with a stronger exchange rate and hence falling import prices. The net effect is that the third-quarter inflation update due mid-October is likely to show the CPI running close to zero year on year, hopelessly below the Reserve Bank of New Zealand’s 1%-3% target band.
Critics say the RBNZ has created a rod for its own back by stubbornly holding the official cash rate well above that of the G10. Market pricing suggests an 80% chance the rate will be cut 25 basis points to 1.75% in the Monetary Policy Statement
due for release on November 10, but with the Trade Weighted Index now moving away from the trajectory required to bring inflation back into the target zone (see chart below) the odds of a pre-emptive move at the bank’s less formal meeting on Sept 22 are growing.
NZ TWI chart (click to enlarge)
The Reserve Bank of Australia
doesn’t make exchange rate projections when updating its economic forecasts, simply assuming the current level will prevail into the future and adjusting its policy rate to compensate if necessary.
Yesterday RBA Governor Glenn Stevens chaired his final monetary policy review meeting prior to handing the baton over to his deputy Philip Low. The post-meeting statement suggested the bank is relaxed about the way the economy is progressing, even though inflation is expected remain “quite low for some time”. Clearly the bank’s board is placing no pressure on itself to push inflation back up into the 2%-3% target band in a hurry, instead judging that “holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time”.
The bank’s expectation of ongoing “sustainable growth” was supported by the second-quarter GDP numbers released today showing the economy expanding 3.3% year on year. This is well ahead of the RBA’s estimate of potential at 2.75% and will give the bank hope that, all things being equal, inflationary pressures will emerge. However, as in New Zealand, all else is not equal: an appreciating Aussie dollar will “complicate” matters.
We will find out whether the government is as relaxed about below-par inflation shortly when the new governor signs a performance agreement with the Treasurer. There is some talk the inflation target range could be lowered to 1%-3% or RBA’s forecast period extended to three or four years to give it more flexibility around meeting monetary policy objectives. There has been some minor party support for such moves in the parliament.
In a world of subdued economic growth and zero-bound interest rates, the Aussie and Kiwi dollars are marching to their own drum. Their Achilles heal – commodity prices – seem to be holding up well, at least in the short term, clearing the way for further gains against a USD unable to gain any traction.
– Edited by Susan McDonald
Max McKegg is managing director of Technical Research Limited. If you would like an email notice each time Max posts a trade or article then click here or post your comment below to engage with Saxo Bank's social trading platform.