NZD
The CPI index rose a stronger than expected 1.6 percent in the June quarter, taking the annual headline inflation rate to 4 percent.  The quarterly increase is the highest since the June 1990 quarter.  Unsurprisingly, food (up 2.2 percent) and petrol prices (up 12.8 percent) combined accounted for 1.1 percentage points of the quarterly increase.  The housing group also made a strong contribution (up 1.2 percent) mainly due to a 3.6 percent increase in electricity prices.
However, it was particularly encouraging to see services inflation contained (up 0.6 percent in the quarter).  Outside of food, fuel and energy, everything else seems reasonably well behaved.  CPI ex-food, petrol and energy increased 0.4 percent.
Net on net, we suspect last week’s data still leaves the market (and ourselves) scratching our heads over the path for monetary policy.  Given the sharp slowdown in the economy and signs the labour market is easing (based on hiring intentions and difficulty finding labour gauges from the latest QSBO survey), the RBNZ can have greater confidence that medium-term inflation pressures will ease.

AUD
Last week’s speech from RBA governor Stevens revealed a growing confidence this tightening cycle is over.  The desired slowing in demand is evident, and advanced, and accordingly the Governor is more confident inflation will be lower in the medium term.
Data out last week in Australia was the Import Price Index which came out weaker than expected for the second quarter at 1.4%.  However, the Export Price Index for (2Q) was stronger than had been forecasted at 13.5% from last quarter.
The week ahead as last week was is relatively light with the June quarter CPI to be the data to look out for.  A fortnight ago, a quarter of economists expected the RBA to hike again and a high Q2 CPI was seen as a key risk for an August rise.  Headline CPI is expected to rise by 1.4% in the June quarter, lifting the annual pace from 4.4% to 4.2%.

The week ahead:

NZD
Monday 21st – Visitor Arrivals (June) mom and Credit Card Spending (June) yoy
Thursday 24th – RBNZ Interest Rate Announcement

AUD
Monday 21st – Producer Price Index (2Q) qoq
Wednesday 23rd – Consumer Prices (2Q) qoq and yoy

GBPNZD
Trading opened last week in the late GBPNZD 2.60’s to then fall down to the early GBPNZD 2.59’s for the most part of them middle of the week, Sterling then coming back on Thursday to GBPNZD 2.625 before falling to GBPNZD 2.61’s for close of play.
Last week CPI figures for the UK printed a 16 year high as higher fuel and food costs further increased pressure on the purse strings of the average UK household.  The biggest increases were seen in food and non-alcoholic beverage and the housing and household services sector as was to be expected.  Along similar lines the unemployment figures disappointed, figures released last week showed the largest jump in benefit claims since December 1992.  The majority of these redundancies were seen coming from companies and sectors affiliated with the housing market and the problems therein.
The Reserve Bank New Zealand’s interest rate decision takes centre stage this week.  The decision is a very close one as the RBNZ weighs up a very weak economy, with accelerating headline inflation.  We could witness volatility in the GBPNZD rate leading up to the decision on Thursday and see Sterling rally up towards the GBPNZD 2.63 resistance level and possibly test that if the Reserve Bank decides to cut interest rates.

UK data lines up as follows:

Monday 21st – Rightmove House Prices (July) – mom
Wednesday 23rd – Bank of England Minutes
Thursday 24th – Retail Sales (June) mom
Friday 25th – GDP (2Q) qoq and yoy

GBPAUD
Started the week at GBPAUD 2.05 and remained in the GBPAUD 2.04 – 2.05 band for the beginning of the week.  Sterling climbing out of that range on Thursday to hit the high of the week of GBPAUD 2.06 before closing the week back in the GBPAUD 2.05’s.
As with the GBPNZD (please see above) the poor data that emerged from the UK economy last week with high CPI figures (nearly double the Bank of England’s 2 percent target) and poor unemployment data fueled the AUD the upper hand for the majority of last week with the Sterling on the back foot in light of the poor data.  This week with not much being released in Australia and the data out in the UK forecast to be weak and negative we may well see trading continue in a band similar to last week the rate ranging between GBPAUD 2.04 – 2.06’s.

EURNZD
The EUR started out the week strong against the NZD opening on Monday at EURNZD 2.08.  The EUR gradually declined to the low of the week EURNZD 2.05 on Wednesday and then picked itself back up to finish trading on Friday in the high EURNZD 2.07’s.
Last week there weren’t many surprises in the data released in the Euro zone with Industrial Production (May) down from the previous month and ZEW Economic sentiment (July) weaker than expected.  CPI (June) yoy in line with economists’ forecasts at 4 percent.   Despite these negative results Jean-Claude Trichet, president of the European Central Bank, has argued in comments that suggested he sees the region avoiding a severe downturn.  The 15-country bloc would hit and economic growth “trough” in the second and third quarters of this year but the ECB then expected “a progressive return to ongoing moderate growth,” Mr. Trichet said in an interview with four European newspapers.
Again this week it is the Reserve Bank of New Zealand’s OCR decision on Thursday that takes centre stage with data second tier in nature coming out in the Euro zone.  The trend of late has been range trading between the EURNZD 2.05 – 2.08, leading up to the interest rate decision we may see the higher levels of that band tested with the EUR possibly breaking through the resistance at EURNZD 2.08.

Euro zone calendar looks as follows:

Wednesday 23rd  – Industrial New Orders (May) mom
Thursday 24th       – German PMI Manufacturing (July) and IFO Business Climate (July)
- PMI Current Account (May)

EURAUD
The EUR lost some ground on the AUD last week, opening play on Monday at EURAUD 1.64 to gradually fall to the low of the week on Wednesday of EURAUD 1.62 and then gain back slightly to finish trading at EURAUD 1.63.
The key event in Australia this week is the release of the Q2 CPI on Wednesday.  For many weeks the Q2 CPI was seen as potentially leading to an August RBA rate rise.  But ongoing signs of weaker activity and the commentary from the RBA last week have seriously dented the influence of Q2 CPI on the August decision.
The rate this week might not hold any surprises as the market may have already priced in negative data from both sides we could continue to see range trading between the EURAUD 1.61 – 1.63 levels.

NZDUSD
NZDUSD climbed to a seven week high of above 0.7750 early last week as worries about the US financial sector, in particular the troubled mortgage agencies Fannie Mae and Freddie Mac, weighed heavily on the USD.  As the week wore on a string of better than expected quarterly earnings (including Wells Fargo, JP Morgan Chase and Citigroup) and a significant drop in crude oil prices soon had both US equity markets and the USD rebounding and NZD finished the week closer to NZDUSD 0.76.
News on the US economy continues to indicate it hasn’t fallen into the deep recession that many analysts feared at the start of the year.  The IMF announced it now expects the US economy will grow 1.3% in 2008 (vs. the 0.5% it forecast back in April) and 0.8% in 2009 (vs. 0.6%).
For the week ahead we may continue to see the rate trade between NZDUSD 0.75 – 0.77 and we’ll likely need to see some fresh impetus (either in the form of a melt-down in risks appetites or an extremely dovish RBNZ statement) before the NZDUSD makes a convincing break below 0.7445 (the June 13 low).

Data out in the US this week:

Tuesday 22nd – Leading Indicators (June)
Wednesday 23rd – House Price Index (May) mom
Thursday 24th – Fed’s Beige Book
Friday 25th – Initial Jobless Claims (w/e July 20th)

AUDUSD
The AUD gained from its opening position of high AUDUSD 0.96’s to reach the early AUDUSD 0.98’s on Tuesday and to trade for the majority of the remainder of last week between the AUDUSD 0.97 – 0.975 band.
With more data being released on the US side we may see the AUD rally slightly on the USD if the results are negative, the rate possibly pushing the AUDUSD 0.98 end of the band.

AUDNZD
Last week was a mixed week for the AUDNZD rate, opening in the early AUDNZD 1.27’s to fall to 1.26’s on Wednesday and then closed play at AUDNZD 1.274 on Friday.
Again New Zealand is the country to watch this week with the interest rate decision with a 50-50 chance of a rate cut.  Equally convincing arguments can be made to support both a decision to cut and a decision to hold rates at Thursday’s OCR review.
The AUDNZD rate could push into the 1.28’s in expectation of a rate cut, In light of the AUD gains recently we might not see it rise too far above that level in the near future.

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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.

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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.

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