NZD Tumbles On Dovish RBNZ, Lowest Since March 2016



The USD narrowly mixed against most of its G-10 peers as idle summer range trading continues. The GBP has reversed from a fresh 12-month low reached in earlier trade while the NZD is sharply lower on the session following the RBNZ policy decision which saw rates left on hold – as expected – but the central bank turning somewhat more dovish and pushing out its first anticipated rate hike by a full year relative to the policy guidelines it provided in May.

The Kiwi has slipped more than 1% on the day as the RBNZ balks at the tilt towards incrementally tighter policy seen among other, developed market central banks. The CNY firmed a little in Asian trade while the TRY has plunged again, with the USD reaching a new high just shy of TRY5.45. European equity markets are trading defensively but US futures are positive and major bond markets are mixed.

Crude prices are lower on the day but precious metals are modestly firmer. FX markets are in the summer doldrums, with the well-established sideways range trade between 94.00/95.50 in the USD index extending further into August. A light data calendar will do nothing to lift market interest today; the US releases weekly claims, PPI and (final) wholesale inventory data ahead of the CPI figures tomorrow.

Canada releases housing starts and new house prices. Look for more range trading in the USD generally in the near-term with upside potential in the big dollar limited at this point as supportive economic and monetary policy expectations are already largely factored in to the exchange rate.



Source:  Scotia Bank, Bloomberg, Daily FX. FX Street

EUR: The ECB’s monthly bulletin noted that the Eurozone economy was proceeding along a “solid and broad-based growth path” but that uncertainties, in the form of protectionism primarily, remain prominent. The cautiously confident undertone reflects recent comments from ECB policy makers that steady growth will drive inflation towards convergence with their inflation target even as it proceeds with a gradual winding down of asset purchases. Short-term rate differentials remain widely in favor of the USD and while spreads have not provided much in the way of obvious, additional support for the USD, the yield gap makes the EUR an unattractive long for investors amid idle range-trading.

GBP: The pound slipped to its lowest in almost a year earlier in the session as hard Brexit jitters continue to weigh on sentiment. There were no UK data releases today (trade, industrial production and GDP data are all due tomorrow, however). UK PM May is reportedly stepping up “hard Brexit” preparations and has lined up a top-level cabinet meeting for early Sep to discuss the way forward. Uncertainty risks unsettling the GBP in the coming weeks as exit talks with the EUR appear to have reached an impasse.

CAD: CAD is quietly consolidating just above the midpoint of its wide three session range following Wednesday’s impressive recovery. Sentiment remains dominant as market participants assess the ongoing barrage of headlines relating to both the Saudi/Canada diplomatic dispute as well as the latest on NAFTA. Canada and Mexico are said to be planning joint talks next week in Washington in the hopes of reaching a deal on autos. Fundamentally, the data-driven firming in domestic rate expectations has offered CAD support and delivered a narrowing in interest rate differentials. OIS are pricing over 20bpts of BoC tightening for October, nearly two 25bpt hikes by January, and the 2Y U.S.-Canada spread has narrowed within 55bpts to levels last seen in early June. Medium-term risk reversals (3m, 6m) are showing a continued erosion in the premium for protection against CAD weakness.

JPY: JPY has faded its modest early Asian session gains and is entering Thursday’s NA open unchanged vs. the USD, around levels prevailing ahead of last week’s BoJ. JPY has staged an impressive recovery over the past week, firming in response to shifting expectations for central bank policy following the BoJ’s widening of the trading band for the 10Y JGB yield target and subsequent rumors relating to abandoned policy rate adjustments. Yield spreads have shown signs of stabilization however measures of sentiment are signaling a rise in the cost of protection against JPY strength vs. both the USD and EUR. Speculative JPY positioning is bearish and extended, leaving shorts vulnerable to adjustment. Japan releases Q2 GDP data at 7:50pm ET.

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