NZD
Last weeks NZIER’s Quarterly Survey of Business Opinion (QSBO) for the June quarter illustrated that businesses in New Zealand are feeling the strain and the economy is heading backwards, but inflation still remains high.

A net 18 percent of firms reported their own activity contracted over the past three months – the weakest level since 1998. Firms’ expectations for the coming three months were also fairly negative, with a net 18 percent expecting activity to fall – this is the lowest levels since March 1991.  Not only does it suggest that the negative GDP quarter for Q1 was not an aberration, but a contraction in Q2 is likely (if not worse than in Q1) and Q3 is also looking negative.

This leads us on to the big event of this week, namely the Q2 CPI release due Tuesday 15th July.  It is being viewed by many as the make or break for whether the RBNZ decides to cut interest rates as soon as next week or not (they meet on the 24th July to decide).   CPI is expected to grow 1.4%q/q, taking annual inflation to 3.8%.

While the CPI release may have a reasonable influence on the RBNZ’s OCR decision next week, there are other factors involved, and the recent run of negative reports across all sectors in NZ (including today’s May retail sales figures -1.2% versus -0.2% expected) have put the chance of a cut to the Official Cash Rate at the end of July up to 50%.  Analysts are also suggesting that a July cut maybe the first of three before the end of the year.

Despite the doom and gloom on the domestic front in New Zealand it is worth looking at things in a broader perspective – the aforementioned predicament facing the RBNZ of high inflation and negative growth is one faced by the majority of the worlds leading economies so it is not alone in it’s current problems.

AUD
Following their Board Meeting on July 1, the RBA acknowledged that there had been ‘tentative signs of an easing in labour market conditions.’  However Thursday’s employment data for June seemed to contradict that, with the ABS reporting a large 29,800 increase in June, more than reversing the 25,600 fall in May.

Recent employment figures have been very volatile, with a range of -37k to +30k in the past three months.  If we look beyond the recent monthly volatility there are some signs that the labour market is slowing. In trend terms, total employment rose by just 8,500 in June 2008, well down from the 20-30k trend monthly growth seen through 2007.

The prospect of higher unemployment is certainly a contributory factor for the RBA to keep interest rates on hold for now.  Many economists also believe that the next move they make will be a cut in the cash rate. However the RBA is unlikely to cut interest rates until we see the unemployment figures pick up.  In the current climate this could well take until the middle of next year by which time there could be enough room for the RBA to move.

The week ahead is a quiet one for the economic calendar in Australia.  The main features are the release of the RBA minutes (due Thursday) and RBA Governor Glenn Stevens’ speech updating us on the outlook for the Australian economy (Wednesday).

The week ahead:

NZD
14th July – Retail Sales (May) and Retail Sales ex. Auto (May)
15th July – Food Prices (Jun) and CPI (Consumer Prices) 2Q

AUD
17th July – RBA Foreign Exchange Transaction (Jun)
18th July – Import and Export Price Index (qoq)

GBPNZD
Started the week at GBPNZD 2.6113, climbed to the peak for week at 2.63 on Tuesday, and then dropped in the lead up to the UK interest rate decision to 2.60 on Thursday before climbing back to 2.61 at close of play on Friday.

As expected, the MPC kept interest rates unchanged at 5.0% last week.  Despite the downside risks to growth, interest rates are now likely to remain on hold in coming months.  As and when inflation eases and spare capacity in the economy rises, there is a good chance that their next move will be a cut but it is unlikely to occur this year.

Outside of the interest rate decision, the UK data last week mostly came out poor hence the limited movement in the rate.  UK manufacturing production fell by 0.5% in May.  The more volatile overall industrial production data was also negative – falling 0.8% on the month, as utility output fell 5.2% (the largest fall since October 2001), owing most likely to the warm weather over May.  Also the UK housing data unsurprisingly looks set to drop further – The Department for Communities and Local Government (DCLG) measure of house price inflation showed annual inflation declining in May to 3.7%yoy from 4.9%yoy in April.

The week ahead has both CPI data released in New Zealand (Tuesday) and the UK (Tuesday) – the NZ release going someway to indicate whether the RBNZ will cut the OCR next week so we expect more volatility in the exchange rate this week than last.  If the market starts to price a interest rate cut in NZ as early as next week rather than the previous thinking of September then we should see Sterling gain some ground and maybe test the recent peak of 2.635+ – whether the ground can be maintained is all down to the releases in the UK for the rest of the week – if they all come out negative then expect to see the rate back in the low 2.6’s at the end of the week.

UK data lines up as follows:

14th July BRC Retail Sales Monitor – All (yoy) (Jun) and RICS House Price Balance (Jun)
15th – CPI (Consumer) PPI (Producer) and Retail Sales Index
16th – Average Earnings, ILO Unemployment Rate and Jobless Claims
18th – Public Sector Net Borrowing

GBPAUD
Started the week at GBPAUD 2.055 climbing to the high on Wednesday of 2.074 but with Thursday’s looming interest rate decision in the UK fell back down 2 cent into the mid 2.05’s finishing the week at 2.058.

Sterling was under pressure at the outset of last week as reports from the industrial and manufacturing sectors were much weaker than expected. This of course points to a further pain for the UK economy and problems in the UK financial sector also undermined sterling and gave speculators another reason to sell the pound.  However we saw the GBPAUD rate go against the run of UK data and rise in the first half of the week back towards the upper end of its current band (2.04 – 2.08) in the run up to the weak Home Loans data in Australia on Wednesday.  However a sharp reversal was seen as Thursday’s Australian unemployment data surprised and the market began to focus on the Bank of England’s interest rate decision.

The Bank of England emerged from their policy meeting with their hands as tied as when they went in – rising inflation requires a rate hike but the slowing economy would benefit from a cut.  Unsurprisingly, the members opted for interest rates to be kept as they are.

With a packed economic calendar this week in the UK and little occurring in Australia we expect the rate to continue in its current band.  We have started the week at the lower end (2.05) and may struggle to break upwards as the bias is towards negative data coming out of the UK.

EURNZD
Started the week at EURNZD 2.065, soared to 2.09 on Tuesday, settling back a little on Wednesday at 2.07 and then back to the 2.09 peak for the end of the week.

Following from the week before the Euro started the week maintaining its strength.  Then with the release of the local NZIER Business Opinion Survey huge gains were made as businesses reported negative growth and suggested more negativity was to come.  However the Euro didn’t have it all it’s own way as the EU GDP came in lower than expected on Wednesday.  Trichet, the ECB president, continued to make hawkish noises as he addressed the EU Parliament, claiming that higher food and energy prices were beginning to creep into the broader economy.  However the strength of the Euro was undiminished and it rallied for the end of the week.  Some analysts are suggesting a further interest rate hike could come into play before the year is out in the Eurozone, and this should see the Euro supported at current levels.

The coming week has a reasonable busy week in the Eurozone and like New Zealand they are set to release the latest CPI figures.  The trend in the rate is upwards and given that there is a chance the market will start moving towards an end of July interest rate cut in New Zealand we think we could see the rate push through EURNZD 2.1 which are levels we have not seen since 2001/02.

Eurozone calendar looks as follows:
14th July – Industrial Production
15th July – ZEW Survey Germany
16th July – German CPI and European CPI
18th July – German PPI and European Construction Output and European Trade Balance

EURAUD
Started last week at EURAUD 1.63 moving up on Tuesday to 1.646 with further gains on Wednesday to see it reach the peak for the weak at 1.65, slightly falling back on Thursday to 1.635 but back up again on Friday to close at 1.645

The Eurozone is no exception to the global slowdown and the data last week backs this up, with German industrial production experiencing its biggest decline since 1999 and speculation is increasing that the European economy will experience a contraction in GDP for the June quarter.  However the Euro remains supported (as explained above – see EURNZD) with some economists saying another interest rate hike looms.

Both Australian and European economies are weathering the global economic storm better than most and therefore have made reasonable gains against many pairings.  However against each other they seem well matched for now.  Subsequently we expect a continuation of last week with the rate trading in it’s current band 1.63 -1.65, but in the coming week the Euro has more to lose seeing as it has a busier calendar so we could slide down a fraction if any of the releases disappoint.

NZDUSD
Started the week at NZDUSD 0.7580 dipping to 0.75 on Tuesday and then from Wednesday onwards maintained strength at around the 0.76 mark

The US Dollar took a further slap in the face at the end of last week as the credit crisis may have taken another turn for the worse with rumours surrounding Fannie Mae and Freddie Mac.
Both are shareholder-owned but government-sponsored enterprises that own or guarantee roughly US$5 trillion of debt, close to half of all outstanding US mortgages.  US Treasury Secretary Paulson said he wanted the companies to remain shareholder-owned, which rules out a government takeover.  While regulators could engineer a bailout by someone else (ala JP Morgan for Bear Stearns), the sheer size of the two make this unlikely. We will have to see what comes about this week but there is talk the US Treasury and the Fed will be making statements on the situation later today.

With negativity coming from both the NZ and US side neither currency seems able to make significant gains against the other.  However we may see the upper end of the current band (0.75-0.77) tested this week as the latest round of credit crisis problems washes over the US.

There is a packed calendar on the US side this week, of note:
15th July – PPI (Jun), Retail Sales (Jun) and Retail Sales ex. Auto (Jun)
16th – CPI (Jun) and FOMC minutes from the June 24 meeting
17th – Philly Fed Survey.

AUDUSD
Started last week at AUDUSD 0.962 dropping to 0.95 on Wednesday and then climbed back to hit the high for the week on Friday at 0.966.

The general trend for July so far is upwards and now the rate has broken above 0.9650 we expect it to rally towards 0.9900.  The lack of Australian data and the current problems in the US (see NZDUSD above) along with a very busy US economic calendar should aid this move.

AUDNZD
Monday 07th July saw AUDNZD trading at 1.268 dropping to 1.258 on Wednesday and then climbing to the high of the week on Friday at 1.27

With the release of the NZ CPI tomorrow and the increasing expectation of the RBNZ to cut interest rates sooner rather than later (July rather than September) the NZD is firmly on the back foot and the trend for AUDNZD is upward albeit reasonably slow moving.

We have opened today at the peak for the year and the last time we were higher was eight years ago in 2000 when the rate peaked at 1.28.  Leading in to the July 24th RBNZ meeting we may well test the 1.28 – 1.30 range.

________________

Please feel free to contact me (renee.doughty@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar.

If you would like to discuss your foreign exchange requirements then please don’t hesitate to call our Southern Hemisphere Office on our New Zealand Free phone number 0800 666114, or Australian Free phone number 1800 701540 or direct on 0064 7839 6114.

Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are “interbank” i.e. for amounts of £5million and thus are not indicative of rates offered by World First for smaller amounts. E&OE. Definitions of jargon/market terms can be found in our Glossary of Foreign Exchange Terms