NZD Soars as RBNZ Signals 2014 Rate Hike

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Daily FX Market Roundup 09-11-13

NZD Soars as RBNZ Signals 2014 Rate Hike
AUD – Will Job Growth Return?
CAD – Oil up, Gold Down
JPY – Is the Olympics the Fourth Arrow of Abenomics?
Expect More Quiet Trading in the Dollar
EUR Faces Ongoing Risks but Losses Against USD could be Limited
GBP Soars to Fresh Highs on Stronger Employment Numbers

NZD Soars as RBNZ Signals 2014 Rate Hike

Unlike other major central banks, the Reserve Bank of New Zealand is getting ready to raise interest rates. While the RBNZ left monetary policy unchanged today, Governor Graeme Wheeler said they will keep rates steady through 2013 but are likely to raise interest rates in 2014. This is the most direct signal of monetary tightening that we have heard from any of the G20 nations and this bias should be extremely positive for the NZD. The New Zealand dollar had already been enjoying a strong recovery this month and the rally will likely gain traction thanks to the hawkish bias of the central bank. The New Zealand dollar is still too high in value but with export commodity prices on the rise and the recovery becoming more broad-based, the RBNZ has grown more confident about the country’s recovery. The strength of housing market is also raising concerns for the central bank. House prices in Auckland and Canterbury are rising at rapid rates but the RBNZ believes that higher construction and restrictions on high LVR mortgages will help to cool the market. If it doesn’t however, they may have to rethink monetary policy and possibly raise rates sooner. As these are the most hawkish comments that we have heard from a major central bank, investors could start to see the New Zealand dollar in a new light and drive the currency up another 3 to 5 percent. Meanwhile the Australian and Canadian dollars also extended their gains with the AUD climbing to a fresh 2 month highs against the U.S. dollar. Like businesses in Australia, lower interest rates and this weekend’s elections boosted consumer confidence. Tony Abbott’s party pledged to boost the economy with lower taxes and less red tape, steps that could reenergize the economy. Australian employment numbers are scheduled for release this evening and economists are looking for job growth to rebound in the month of August but unfortunately stronger labor market conditions in the manufacturing sector was offset by weaker employment conditions in services and construction. As a result, we would not be surprised if the data surprised to downside especially since economists are already looking for a higher unemployment rate.

JPY – Is the Olympics the Fourth Arrow of Abenomics?

While the Japanese Yen traded higher against most of the major currencies, the gains were modest. Economic data out of Japan continues to surprise to the upside with the Business Index Survey of large manufacturing conditions rising to a 4 year high in the third quarter. This may not be a report that is followed closely but it is another sign that Abenomics is working. Large manufacturers have grown more optimistic thanks to improved earnings and stronger domestic conditions. If the Nikkei extends higher and economic data continues to surprise to the upside, new multi-year highs in business confidence could become a new trend for Japan. Bank of Japan monetary policy committee member Ishida said last night that Japanese growth should exceed its potential even with the tax hike. He also said the central bank has not pre-committed to any monetary policy measures but will monitor the economy’s reaction to a sales tax hike and make policy adjustments if necessary. Winning the Olympics Games bid is also a big plus for Japan’s economy and confidence according to Ishida. The Japanese government believes that Olympics related investment and spending should contribute JPY 3 trillion (US$30 billion) to the economy and create 150k jobs. More trains, a new airport terminal, highway expansion and new athletic stadiums are just some of the infrastructure projects that will be take place. There’s no question that confidence in Japan will benefit from the Olympics and there will be increased economic activity ahead of the event but the cost of hosting the games have been on the rise especially because due to the cost of security and the impact generally fades once the games end. Nonetheless, 6 years is a long time the Olympics could very well the fourth arrow in Abenomics.

Expect More Quiet Trading in the Dollar

On Thursday we finally have some U.S. data for forex traders to react to but we don’t expect any big moves in the dollar. The weekly jobless claims report is scheduled for release and it will be followed by Friday’s retail sales report. We have learned over the past few months that fewer firings do not automatically translate into stronger hiring. Jobless claims fell to its second lowest level in 5 years last week with the 4 week moving average dropping to its lowest level since October 2007. At the time, the Labor Day holiday forced data from 3 states to be estimated. This week we will not only be watching for the week-to-week change but also revisions. While the low level of jobless claims have not translated into a significant pick up in non-farm payrolls it is still a number that investors watch carefully especially as they try to determine if the Federal Reserve will act this month.

Overall, it has been a quiet day in the foreign exchange market with the U.S. dollar trickling lower. Currencies, equities and commodities had little reaction to last night’s speech from President. September has been a month of breakout moves in currency pairs such as the GBP/USD, USD/JPY and AUD/USD but the follow through has been weak. This lack of extension highlights the level of hesitancy in the market as investors eye the recovery in currencies and equities with caution. There are clear signs of stabilization in China but data out of the U.S. and Europe have been uneven and unfortunately we don’t expect this to change anytime soon.

EUR Faces Ongoing Risks but Losses Against USD could be Limited

The sell-off in the U.S. dollar today drove the euro above 1.33. The market’s appetite for dollars has been the primary driver of EUR/USD flows because the outlook for the Eurozone is grim as weak economic data from Germany and France could be followed by lower growth expectations. At bare minimum tomorrow’s Eurozone industrial production figures will most likely surprise to the downside. According to Les Echos, a daily financial newspaper in France, the French government plans to cut its 2014 growth forecast from 1.2% to 0.9% and leave their 2013 forecast unchanged at 0.1%. At the same time, the ECB is saying German growth should moderate in the third or fourth quarters and Greece will need another aid package. The Berlusconi political wildcard also poses an ongoing risk for the currency and in the latest developments the Senate Subcommittee has delayed its vote to Thursday. The difficulty of this decision means that more delays are possible. However the EUR/USD may not be affected in a meaningful way because the risk of holding dollars offset the risk of holding euros. While no major surprises are expected in Thursday’s jobless claims report, Friday’s U.S. retail sales numbers may not be satisfactory enough for FX traders to buy dollars, leaving the EUR/USD to trade in its existing range. So instead, the euro could see more consistent losses against the British pound. 84 cents is a very important support level for EUR/GBP that we expect to be broken in the medium term with a potential move down to 82 cents for the pair. If EUR/GBP rallies, we would view that as an opportunity to sell at a higher level.

GBP Soars to Fresh Highs on Stronger Employment Numbers

Continued improvements in U.K. data drove the British pound to fresh 7 month highs against the U.S. dollar and euro. Economists had been looking for jobless claims to fall by 21.2K but instead they dropped by a -32.6k while unemployment rate fell to 7.7% from 7.8%. The trend of upside surprises in U.K. data will make it difficult for Bank of England Governor Mark Carney to convince investors that the outlook for the U.K. is grim. Yet given the recent extension in sterling, his speech tomorrow will be watched very closely. If Carney ignores the recent improvements and focuses on the downside risks to the recovery, the currency pair could fall victim to profit taking but unless it is accompanied by downside surprises in data, the losses should be limited. According to our colleague Boris Schlossberg who covered the U.K. release thoroughly, “The quarterly unemployment rate of 7.7% is at its lowest level in more than a year and is a testament to the fact the UK economy continues to rebound strongly after being mired in a series of contractions since the 2008 financial crisis. The decline in the unemployment rate is likely to put further pressure on the BOE to curtail its dovish stance. Governor Carney has noted that BOE would change its accommodative stance if the unemployment rate dropped to 7% or less.” While achieving this goal won’t be easy, a stronger domestic and global recovery would facilitate the improvement.

Kathy Lien
Managing Director

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