The ‘Aussie’ has gained close to 8 cents against the ‘Kiwi’ in the three weeks since the Reserve Bank of New Zealand sent the message to investors that they would not consider raising the Official Cash Rate (OCR) within the short term and provided a particularly dovish tone to the accompanying statement of the last interest rate decision leaving investors to speculate as to the possibility and timing of an interest rate cut for New Zealand, which is currently offering the highest yield of the industrialised economy.
Tuesday at the commencement of local trading the AUD/NZD exchange rate was trading in the mid 1.08 range, however lost over half a percent after the release of the Minutes of the Monetary Policy Meeting for the month of May by the Reserve Bank of Australia (RBA) and Reserve Bank of New Zealand’s (RBNZ) release of Inflation expectations.
The RBA Meeting minutes provided nothing in terms of noteworthy significance for investors to grasp at for any indication of the future positioning of the RBA on monetary policy changes. The closing statements providing only ambiguous comments on their positioning stating that the board agreed that at the time of the cash rate decision the accompanying statement should not contain any guidance on the future path of monetary policy.
The RBNZ survey released yesterday lifted the expectations for inflation over the next two years, from 1.8 per cent to 1.86 per cent. Prior to the release of this survey the market was pricing in a 58% expectation of a rate cut for New Zealand at the next RBNZ meeting in June. Following the improvement to inflation expectations the ‘Kiwi’ jumped against a basket of currencies and the market expectation for a rate cut reduced to 50%, as investors took this information to indicate a rate cut a less likely bet for the next RBNZ meeting.
Jane Turner, Senior Economist at ASB Bank, stated that the survey suggests ‘there’s no urgency for a rate cut in June,’ whilst she is still expecting two rate reductions by the RBNZ this year she did make mention of the importance of other factors in Governor Graeme Wheelers decision…. ‘Inflation expectations won’t be the only measure the Reserve Bank is looking at when assessing price stability.’
Another important factor in the health of the New Zealand economy is that of dairy pricing. This morning provided the release of the New Zealand Global Dairy Trade giving the market an indication of the change in average price of dairy products sold at auction. Dairy pricing has been falling since March and is of significant concern as a leading indicator of the nation’s trade balance. The result today was decline of 2.2%. Whilst still a decline in pricing a slight improvement from the previous release which was a reduction of 3.5%.
The remainder of the week will continue to focus on the New Zealand side of the currency pairing for market movements with the New Zealand Treasury releasing their Annual Federal Budget Thursday, along with less significant data releases of Visitor arrivals and credit card spending.
Leading up to the next Interest Rate decisions by both Countries in June we are likely to see a high amount of volatility as investors speculate on the decisions due to be made by both Reserve Banks.
The Australian Dollar to Euro Exchange Rate Gains over 1%
The Australian Dollar to Euro (AUD/EUR) Exchange rate rallied yesterday afternoon, despite the nonspecific Meeting Minutes out of the RBA. Whilst the ‘Aussie’ lost ground against other majors throughout yesterday’s trading session the AUD/EUR exchange rate made it to a high of 0.7142 overnight and has settled to an opening of just above 0.71 at 8:30 AM this morning.
Overnight German Zew Economic Sentiment was down on the forecasted result at 41.9 and Euro-Zone final CPI Figure flat with last month’s annualised figure at zero.
Leading into the closure of this week’s trading the European Central Bank (ECB) is having a panel discussion in Portugal on ‘Inflation and Unemployment in Europe’ where both ECB President Mario Draghi and Bank of England Governor Mark Carney will be speaking. This panel is likely to provide some insight into the future monetary policy for both major currency pairings. The AUD/EUR exchange rate is currently trading at 0.7106 and the AUD/GBP is currently trading at 0.5098 at 8:30 AM AEST Today.