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NZD to be influenced by softer USD tone – BNZ

In view of Jason Wong, Senior Markets Strategist at BNZ, the key theme last week was a softer USD as we saw some doubt from the Fed about the nature of the recent weakness in US inflation. 

Key Quotes

“Fed Chair Yellen noted “…my colleagues and I are not certain that it is transitory, and we are monitoring inflation very closely”. This was followed by minutes of the last FOMC meeting that revealed “…many officials observed that low inflation might reflect not only transitory factors, but also the influence of developments that could prove more persistent”.”

“This saw the NZD up 1% for the week to 0.6880, removing the immediate threat of breaking down further, with the previous week’s low around 0.6780 a key support level.  Despite another surprisingly weak GDT dairy auction – the fourth consecutive fall in pricing – the NZD managed to hold its ground or show modest gains on most of the other crosses.  This might suggest that the selling pressure we’ve seen in the NZD over recent months might now be over.”

“The ANZ business outlook survey on Thursday is expected to show business confidence slumping further, being the first clean read since the new government was formed.  We’d ignore the grumpiness of business – the impact on economic activity is not expected to be significant.  Any possible short-term negative NZD reaction to this release is expected to be transitory.”

“Ahead of that, the RBNZ’s Financial Stability Report is expected to outline a roadmap for the removal of LVR restrictions.  The six-monthly report isn’t usually market moving but at the margin a loosening up on macro-prudential policy is slightly NZD-positive at the margin.”

“The only major currency we follow that the NZD fell against last week was against EUR, with NZD/EUR down slightly and threatening to continue to trend lower.  Data showed the euro-area economy booming with fresh highs in the PMIs and business confidence in Germany.   Meanwhile, it boggles the mind why the ECB will still be buying bonds right through to at least September 2018 to keep interest rates suppressed.  It feels a safe bet to conclude that the EUR will be forced to do the heavy lifting while the ECB sits on its hands.  The next support level for NZD/EUR is around 0.5550.  A weaker NZD/EUR has been our strongest conviction call and we see no reason to back away from that view.  CPI data late in the week is expected to show euro-area core inflation remaining soft at 1.0%.”

“Other news to watch on the international calendar are comments from Fed Chair Yellen at her semi-annual testimony to lawmakers and her replacement Powell, speaking at his Senate confirmation hearing.  The risk is that they come across as dovish as they note the soft inflation backdrop.  Focus will shift back to US tax policy as the Senate votes on the tax reform bill.  Even if the Senate does vote for the tax reform bill there are further hurdles to cross, namely a reconciliation between the House and Senate versions.  Key US data are at the end of the week, including the PCE deflators and ISM manufacturing index.”

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