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FX Update - RBNZ releases drive the NZD lower

Written by Ian Dobbs on September 30th, 2014.      0 comments

Market Overview:
Both the Australian and New Zealand dollars have had a tough week, driven lower by soft commodities and central bank releases. This has particularly been the case for the NZD that has seen dramatic falls on two separate occasions over the past week thanks to the RBNZ. The currency remained stubbornly strong of much of this year, but since turning back in mid-July, the move to a more realistic level for the NZD is happening a lot quicker than many would have thought. Interest rate hikes in the US and UK are also now on the horizon and this will only add fuel to the fire of exchange rate normalisation. A notable pick up in foreign exchange rate volatility has yet to spill over into other markets, but the risk is certainly there for both equities and long term interest rates suffer a similar fate over the coming months.

There hasn’t been much in the way of actual data released from Australia over the past week. Over the coming days however we do get retail sales, building approvals and the trade balance to digest. The RBA signalled their concerns about the amount of leverage in the housing market when they released their Financial Stability Report last Wednesday. This was backed up by comments from Governor Stevens the following day. It now seems politicians are jumping into the argument and they have asked RBA officials to appear in front of the Australian Senate’s economics committee on Thursday for a special hearing on the matter. Some reported comments from committee members have been less than supportive of the RBA’s view so it could be an interesting event. The committee can’t argue with facts however, and Australian’s now hold a record amount of mortgage debt relative to their incomes at 137.1 per cent. That is five percentage points above the previous peak just prior to the global financial crises. That statistic combined with the fact that Australia has one of the most overvalued housing markets in the world, would worry any central bank.

New Zealand
The only data from New Zealand the past week has been a much better than forecast result from the trade balance. It had little effect on the currency however that has been on the back foot thanks to some releases from the Reserve Bank of New Zealand. Firstly we had last week’s press release stating how the level of the NZD was ‘unjustified’ and ‘unsustainable’ and that these were key considerations when deciding to intervene. Then yesterday we find out that the RBNZ did just that in August. They sold a total of 521 million NZD during that month, and confirmation that the bank had been intervening sent the currency spiralling lower again. The market is clearly nervous about the possibility of further intervention and comments from PM John Key yesterday that fair value for the NZD was around 0.6500 also weighed. In terms of the RBNZ intervention, that is the most they have sold in any month since July 2007 and a good chunk of it likely happened on Monday August 25th. The NZD had a sharp move lower in thin trading conditions on that day and at the time a number of analysts speculated that the RBNZ could have been involved. Still to come this week we have the latest dairy auction from Fonterra which is set for release on Wednesday evening.

United States
Data out of the United States last week was generally supportive of the on-going recovery. Very strong new home sales figures were followed by healthy results from durable goods and GDP data, both of which came in on expectation. The second quarter’s final reading of GDP was the largest since Q4 2011 at 4.6%. Consumer sentiment was unchanged from the previous month at 84.6 and although it was a touch below expectation, it is still at very healthy levels overall and close to post GFC highs. Last night we saw personal income and spending data both of which improved from last month. The core PCE price index (which is the Fed preferred measure of inflation) was unchanged from the month prior at 0.1%. The year on year rate of 1.5% is well below the Fed’s target of 2% and provides little reason for the Fed to rush into rate hikes. Still to come this week we have both the manufacturing and non-manufacturing ISM index’s, the trade balance and the all-important employment report. Last month’s non-farm payrolls data was a little disappointing coming in at only 142k. The market will want to see a return to +200k results this month, and all other indicators suggest that is likely.

United Kingdom
Last week’s mostly second tier data was all a little softer than forecast although it had only a negligible effect on the value of the GBP. Mortgage approvals, public sector net borrowing and CBI realized sales all missed expectation slightly, but certainly not by enough to raise concerns about the recovery. Of more interest will be this week’s PMI’s from the manufacturing, service and construction sectors. These should confirm that the economy remains in good shape heading into the fourth quarter. While some better than expected results might just be enough to sway more voters within the Bank of England’s Monetary Policy Committee to move into the hawkish camp when they meet next week. Last night we saw consumer credit data that remains healthy, increasing by 0.90bn in August. This is in line with the average monthly increase over the previous six months. Somewhat worryingly however, is that loans to small and medium-sized enterprises continue to fall despite the strong economic recovery.

The past week has seen largely disappointing data out of Europe. Business activity figures are dropping as are confidence indicators. Credit growth is weak across the region and this was evidenced by the poor take of the ECB’s recent targeted LTRO. The ECB’s Stournaras says credit growth would be worse without the ECB action, and he could well be right, but that doesn’t help the outlook at all. Central bank officials continue to suggest they are prepared to act again and add more stimulus if necessary. Unfortunately for the ECB this is almost the definition of ‘pushing on a string’. All the cheap money in the world is useless unless someone wants to borrow it. The ECB can’t create demand, but governments can. Unfortunately for Europe at the moment austerity policies are the focus and this is strangling any potential growth on the demand side of the equation. The ECB meet this week on Thursday and we can expect more threats of further action should the economy warrant it. Ahead of that meeting we get the latest reading of inflation which is currently dangerously low at 0.3%. Other data to watch out for this week includes unemployment, German retail sales and French consumer spending.

The only data of note released last week from Japan was inflation. The result for core inflation, after the effect of April’s sales tax was stripped out, stood at 1.1%, a 10 month low. This was also a touch weaker than forecast. Officials continue to talk positively suggesting that a virtuous cycle from income to spending is operating in both the household and corporate sectors, but behind closed doors they must be disappointed with the prolonged negative impact of the consumption tax increase. We get further data this week which will help to gauge how the economy is doing, starting today with household spending, unemployment, retails sales and industrial production. Then tomorrow we get the quarterly Tankan survey of manufacturing and nonmanufacturing sectors which is always closely watched.

There has been no data released from Canada since last Wednesday’s disappointing retails sales figures. The big miss for the core number, coming in
at -0.6% vs expectations of flat, put the Canadian dollar on the back foot and it gave back some of the ground gained recently. The economic calendar is pretty light again this week with just GDP tomorrow and the trade balance on Friday.

Major Announcements last week:
  • Canadian Retail Sales -0.6% vs 0.0% expected
  • NZ Trade Balance -472m vs -1125m expected
  • German IFO Business Climate 104.7 vs 105.9 expected
  • US New Home Sales 504k vs 432k expected
  • US Core Durable Goods order 0.7% as expected
  • US Final GDP 4.6% as expected.
  • RBNZ say the value of the NZD is “unjustifiable” and “unsustainable”
  • RBNZ intervened in August selling NZ$521 million.