Kiwi Hits a Ceiling, Cable Crumbles

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Market Drivers August 11, 2016

Cable falls below 1.2950 on weak RICS
Kiwi finally runs out of steam
Nikkei -0.18% Dax -0.15%
Oil $43/bbl
Gold $1351/oz.

Europe and Asia:
NZD RBNZ Cuts 25bp to 2.00%
GBP RICS at 5 vs. 19

North America:
USD Jobless Claims 8:30
CAD HPI 8:30

With Japan on holiday, the overnight price action in FX was generally subdued but both kiwi and cable saw some action as traders reacted to the news from each country.

In New Zealand, the RBNZ cut rates by 25bp but the kiwi actually rallied in the aftermath of the release as markets were prepared for a full 50bp cut. Speaking at the presser post decision Governor Wheeler acknowledged that the central bank never seriously considered a 50bp cut given the generally stable economic conditions, but he did state the further cuts will be coming in order to combat the deflationary pressures from abroad.

With a 2.00% yield the New Zealand dollar carries one of the highest rates in the industrialized world, leaving RBNZ officials with plenty of scope for further easing. A critical factor in RBNZ’s policy choice was the elevated exchange rate, but the markets actually took the kiwi higher in wild post news reaction that saw it top out near the .7350 level.

Still, some sanity started to prevail in European dealing and the pair came off the highs drifting to a low of 7230. Over the past 48 hours the markets bid up NZD/USD effectively challenging the RBNZ to cut more that the expected 25bp, so it wasn’t surprising that the unit rallied in the post news reaction. But with all the “good” news priced in the kiwi finally ran out of steam near the yearly highs and unless the greenback weakens further we doubt that it will breach those levels anytime soon. The reality of the situation is that the RBNZ is set on an accommodative path and it will continue to lower the yield until the exchange rate declines to its liking.

Meanwhile in UK, cable slipped further below the 1.3000 mark after the RICS house data printed far worse than expected. RICS report came in at 5% versus 19% eyed with the Institute noting that “Sales dropped the most since the financial crisis in 2008” while “Prices rose at the slowest pace in three years in July and new sales declined.”

With UK consumer so heavily leveraged to the housing market, the sharp decline in that asset value is likely to impact consumer spending going forward. Next UK Retail Sales report will be key and if it shows serious deterioration cable could test the post Brexit lows of 1.2750.

In North America today the calendar is quiet, but the dollar appears to be a bit better bid after a two-day selloff and we may see EUR/USD drift back to 1.1100 as the day proceeds.

Boris Schlossberg
Managing Director

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