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Article / 10 July 2014 at 6:04 GMT

Chinese trade data spoil the party for AUD and NZD

Managing Director / Technical Research Limited
New Zealand
  • NZDUSD close to highest valuation since 1984
  • Traders expected more from FOMC minutes
  • US inflation, employment figures remain strong

By Max McKegg

The Australian June employment data released earlier today came in close to analyst forecasts (15900 new jobs versus 12000 expected and unemployment at 6 percent versus 5.9 percent expected). The AUDUSD traded quietly after the announcement but gradually drifted down to 94.00 against 95.50 beforehand. This also dragged NZDUSD down after it had earlier got within inches of it’s highest level since it was floated in 1984. Click on the chart below for a long term record of NZDUSD.
 
NZDUSD monthly chart 

NZDUSD monthly chart
Source: Metastock
 
Soon after the Australian employment announcement we saw Chinese trade data came in a bit below expectations and this also weighed down both the AUD and NZD.
 
Although fairly muted, these events at least produced more action than we saw in the USD post the release of the Federal Open Market Committee (FOMC) minutes of its June meeting. This meeting had taken place before last Thursday’s better-than-expected employment report so it was not surprising it contained little new information. Nevertheless, some traders had been expecting the FOMC to acknowledge the better economic data of late and when this didn’t happen, both the USD and bond yields slipped back into narrow trading ranges. Data compiled by Bloomberg shows that implied volatility in USDJPY, as indicated by six month options, is now the lowest since at least December 1995.
 
The FOMC minutes gave guidance that the Fed’s bond buying program will end in October (some had thought it might drag on until December) but the Committee suggested that markets not read anything into this re the timing of an increase in the Federal funds rate. Hence, there was no change to market expectations that the first policy rate increase will not be until the third quarter of 2015.

As for inflation, the minutes showed it was viewed to be picking up but remained below the Fed’s long-run goal and inflation expectations were seen as being well anchored. Labour market indicators “generally showed further improvement”, although wages remained modest. Many analysts think low wage growth is the key factor supporting the Fed’s recent dovish stand.

Risks to the outlook were viewed to be broadly balanced. Some members were concerned that investors are growing complacent and taking excessive risks. The minutes also focused on exit strategy discussions, with adjustments to “interest on excess reserves” expected to play a central role in the policy normalisation process (changes to the Federal funds rate taking a back seat initially.) The Committee observed that “it would be useful for the FOMC to develop and communicate its plans to the public later this year, well before the first steps in normalising policy become appropriate".
 
So the US economy continues to make good progress towards the Fed’s dual mandate employment and inflation goals and for now markets have confidence that the FOMC is on top of events. This has resulted in rock-bottom levels of volatility in the US currency, bond and stock markets. However, any signs that the committee is getting behind the curve and we would see sharp adjustments in those markets.

- Edited by Adam Courtenay

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