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FX Update : NZD in focus as the RBNZ moves to target NZ’s overheated housing market

Written by Sam Coxhead on July 19th, 2016.      0 comments

Market Overview:
The NZD has been in focus in recent days as the Reserve Bank of New Zealand (RBNZ) moved last week to announce an interim economic update this Thursday. This is a sign that the market took as an increasing frustration over the monetary conditions in NZ. An overvalued exchange rate is likely in the crosshairs and this morning’s move by the central bank to introduce fresh macro-prudential housing restrictions should allow additional breathing room for a further rate cut, and NZD relief when they meet next month. The heated state of the NZ housing market and the exposure of NZ’s financial sector to property has long been of concern to the RBNZ. Today’s move to introduce fresh lending restrictions is aimed at reducing both the heat out of the market and the exposure that the banking system has to the property market, this as some 55% of the banking system’s assets are made up of residential mortgages. No doubt also featuring highly in the RBNZ thinking is a desire to see more capital diverted from property speculation and into the productive economy. Other economies such as Australia and Canada suffer from similar issues, albeit not quite with the relative levels of currency, so it will be of interest to see what effect these further restrictions have.

Strong US data on Friday saw the Australian dollar decline into the week’s end after a week that was led by largely positive local influences. These included the June employment data which showed strength in full-time job creation and firming business confidence which rose from the month prior as it fully reversed May’s dip. Clarity on the Australian election result helped the week get off to a positive note as the Liberal Coalition returned to power, albeit with a reduced mandate. Australian housing finance approvals were seen dipping in May, although the slightly better than expected result showed a continuation of the lack-lustre trend. Housing finance approvals to investors rallied 3.9% for the month (May) and came on the back of a sharp fall the month prior. Consumer sentiment fell in July although the fall was hardly surprising given the recent UK EU exit vote and local election uncertainty. Today’s RBA minutes are the main focus this week.

New Zealand
The first of the key events for the NZD this week was yesterday’s Q2 inflation release which rose by a less than expected 0.4% during the quarter. The number was also less than the Reserve Bank (RBNZ) forecasts (0.6%) and has seen the market move to price in an 80% chance of a further interest rate cut on August 11th. (prior to today’s RBNZ discussion paper). Weakness in the NZD was noted after the number and comes on the back of the easing seen last week after the surprise announcement by the RBNZ to schedule an interim economic update this Thursday. The move caused unease in the market as it interpreted the update as a sign that the RBNZ may be becoming increasingly uneasy with the current monetary conditions in NZ (led by the high exchange rate). The release of a consultation paper this morning by the RBNZ proposing changes to the current loan-to-value (LVRs) (to take effect in September) ratio criteria have been targeted at further restricting lending to the residential housing sector. This is a move aimed at reducing the risks to the financial sector and helping ease the current housing crisis. The announcement has placed the NZD under further pressure in trade this morning as bets for a rate cut at the next meeting increase. Economic data released locally last week was bottom tier and included a rise in electronic card retail sales, a smaller than expected rise in food prices and lift in the latest monthly business PMI. None had an impact on the market as the Kiwi finished the week on it’s lows after Friday’s better than expected US data.

United States
The USD closed on its highs for the week on Friday after a series of better than expected data releases during the day. Investors also sought the relative safety of the USD after news broke of an attempted military coup in Turkey. Data last week was concentrated on Friday’s releases which saw both the key retail sales and industrial production numbers exceed expectations. The inflation data was lower than expected on a headline basis, although the core data continued to lift. The Michigan consumer sentiment and expectations series both printed on the low side of expectations, although the 5-year inflation expectations numbers firmed to 2.6%. Friday’s key retail and industrial numbers helped lift estimates for Q2 and Q3 GDP growth, although for now market expectations for a Fed rate hike remain low ( just 50% by March 2017). US equities surged over the course of the week reaching record highs as investors continue to react to the supportive monetary settings in the US and globally. Other data included conflicting indicators on employment as the JOLTs job openings for May fell and the weekly initial jobless claims held steady against expectations of a rise. Focus this week turns to numbers on building and housing today. Other features include the Philly Fed (manufacturing) on Thursday which comes just prior to the latest data on house prices and home sales.

Last week was a quiet one in Europe which saw gradual gains in the single currency (on the back of the initial GBP rally) eroded on Friday after the release of several pieces of better than expected US data bolstered the USD. Further USD buying was also seen after news broke of an attempted (and failed) military coup in Turkey. This week’s highlight will be Thursday’s ECB meeting where, as was seen with the BoE last week, the market will look for the central bank to signal its wish to gather more information post the UK’s EU exit vote before acting on policy. Data releases from last week included regional and eurozone inflation prints which all came in around expectations and highlighted the continued soft inflationary conditions across Europe. The eurozone and Italian industrial production numbers were both seen as disappointing. Initial focus for the EUR will be on today’s ZEW economic sentiment surveys although expect US data and the ECB meeting to form the core of the focus this week.

United Kingdom
Last week in the UK was marked by the election of new Prime Minister Theresa May to lead the Conservative party and the BoE central bank interest rate meeting. Both events were supportive for the GBP as the market reacted positively to the increased certainty in the UK political environment and after the BoE surprised most by keeping rates on hold at the current 0.5% setting. The bank’s move reflected the desire by most the members to pause and await more economic data in the aftermath of the EU exit vote before moving rates further. Odds remain elevated for a move in August however, especially after the speech from BoE chief economist Haldane on Friday who pointed directly at further easing next month.  This week is set to be busy in the UK and starts with numbers on June inflation and producer prices today. Data on employment will be available tomorrow, whilst numbers from the retail sector will feature on Thursday, although all the releases only incorporate ~ 1 week of Brexit conditions. Expect a greater impact of the vote on the July manufacturing and services PMI data to be released on Friday.

The Yen is trading on a soft footing as fallout from last week’s poor sentiment continues to weigh on demand this week. Last week was marked by discussion on monetary policy in Japan and the need for additional stimulus in order to push Japan out of its current deflationary environment. A win by current PM Abe in the upper house of parliament was seen by him as an endorsement of his ‘Abenomics’ policy which is targeting fiscal stimuli and monetary easing to tackle weak economic growth and low inflation. Data released over the week added to the current sombre assessment of the economy as the core machinery orders, industrial production and capacity utilization numbers all fell in their respective latest reads. Preliminary machine tool orders also dropped heavily in June whilst the latest numbers on producer prices rounded out the ugly data wrap. There are few local leads this week to look forward to, although investors will watch the first read of the manufacturing PMI numbers on Friday which are expected to show conditions remaining well in contraction territory.

A series of better than expected US data on Friday took some of the shine of the Canadian dollar’s rally last week. The move up prior came largely as a result of the less dovish than expected BoC monetary policy review on Wednesday. The review mitigated any impact from a falling oil price which suffered as investors contemplated the continued large inventory overhang. Data released during the week included a jump in the latest housing starts for June, this as house prices continued to move higher in the month prior. Data from the manufacturing sector surprised to the downside as sales fell markedly in May. Data this week is concentrated on Friday as we receive the latest inflation numbers and indicators from the retail sector. Wholesale sales are released a day earlier, although until Friday expect leads to come from the greenback and any news in the energy markets.

Major Announcements last week:

·  Australian Home Loans, -1.0% vs. -2.0% exp. (May)
·  US JOLTs Job Openings, 5.5M vs. 5.7M exp. (May)
·  EU Industrial Production s.a., 1.2% m/m vs. -0.8% exp. (May)
·  Canada BoC Cash rate, 0.5% as exp.
·  Australian Employment Change, 7.9k vs. 10.0k exp. (Jun.)
·  UK BoE Cash Rate, 0.5% vs. 0.25% exp.
·  China Q2 GDP, 6.7% y/y vs. 6.6% exp.
·  US Retail Sales, 0.6% m/m vs. 0.1% exp. (Jun.)
·  US Inflation, 0.2% m/m vs. 0.3% exp. (Jun.)
·  US Industrial Production, 0.6% m/m vs. -0.3% prior (Jun.)
·  Japanese Industrial Production, -2.6% m/m vs. -2.3% prior (May)
·  NZ Q2 Inflation +.4% vs +.5% exp