NZD
The RBNZ ended the suspense of the ‘when to cut rates?’ question last week by cutting the Official Cash Rate 25bp to 8%, and this was accompanied by a surprisingly dovish statement.   This led to many analysts reviewing their Q2 and Q3 projections and very poor figures are predicted.  Some now expect the Reserve Bank to continue cutting rates over the coming year all the way down to 6.50% or lower. If this proves to be the case then the next reduction in rates should occur at the 11th September meeting.

The net result in the currency markets was that the NZD unsurprisingly lost ground across the board.  The coming week is not likely to see too much improvement for the NZD – Tuesdays Building Permits data will potentially be weak given the softness of the housing market and the NBNZ Business Confidence data on Friday will give us the first insight into how Quarter three 2008 is shaping up in New Zealand.

Ultimately on the currency side of things it is not now a question of whether the NZD will weaken but more a question of by how much?  How quickly it depreciates in value will depend on the global environment and commodity prices.  The depreciation of the currency will also have a reasonable bearing on the RBNZ’s desire to cut the OCR rate – if the value of the NZD falls too much too quickly they will have to reassess the move to cut rates.

AUD
The main feature of last week in Australia was the CPI release for 2nd Quarter 2008.  The release showed that headline inflation was slightly higher than expected with the largest price increases coming in deposit and loan facilities (+9.5%).  Other large increases were in fuel (+8.7%), rents (+2.2%) and medical services (+4.0%).

Despite inflation being marginally higher than anticipated analysts within the banking sector have suggested that inflation will drop in the 3rd Quarter 2008 and should be back in line with the RBA’s target at some point during the coming year.  This will then give the RBA room to manoeuver and cut interest rates – the market is currently pricing in a 13% chance of a rate cut by March next year.
The week ahead:

NZD
Monday 28th – Trade Balance (June), Imports and Exports (June)
Tuesday 29th – Building Permits (June)
Wednesday 30th – Money Supply (June)
Thursday 31st – NBNZ Business Confidence (July)

AUD
Monday 28th – NAB Business Confidence (Q2)
Wednesday 30th – Building Approvals (June)
Thursday 31st – Private Sector Credit (June), Trade Balance (Jun), Retail Sales (June)
Friday 1st – RBA Commodity Index (July), TD Securities Inflation (July)

GBPNZD

Last week saw some big moves in the GBPNZD rate.  Starting the week at 2.6160 we rose up on Wednesday leading in to the RBNZ decision and with some positive data from the UK (MPC minutes) we hit the peak for the week on Thursday at 2.69 but then with the UK data on Thursday coming out poor we settled back to finish the week at around 2.68.

The start of last week wasn’t particularly rosy for Sterling as The Royal Institute of Chartered Surveyors posted their thoughts that the housing market will continue to fall and David Blanchflower, one of the Bank of England’s MPC, voiced concerns that the UK economy is already in a recession.

With last Wednesdays release of the minutes for the latest Bank of England interest rate decision (July) Sterling was given a boost as there was a surprise vote for a UK interest rate hike – Tim Besley voted for a hike to 5.25% to combat the rising inflation problem while David Blanchflower, unsurprisingly voted for a cut to stimulate growth and haul us quickly away from a recession. The minutes of the meeting were much more hawkish than expected which further helped GBP. However this was the end of the positivity on the UK side as Thursdays retail sales figures came out poor (-3.9%) which confirmed that growth in the UK economy is indeed faltering.

Nonetheless it wasn’t the UK data that was the main driver of the rate last week – the RBNZ’s decision to begin their likely cycle of cutting the OCR rate put NZD on the back foot.  Subsequently the rate has pushed to the high for 2008.

Looking ahead to the coming week we expect the rate to pull back a fraction from the peak of last week but nonetheless maintain levels in the mid 2.6’s

This week in UK calendar:
Tuesday 29th – Money Supply (June), Sterling Lending (June), Mortgage Approvals (June) and CBI Distributive Trends (July)
Wednesday 30th – Consumer Confidence (June)
Friday 1st Aug – PMI Manufacturing (July)

GBPAUD

In many respects the GBPAUD rates movements mirrored that of the GBPNZD.  At the start of the week the rate sat in the middle to low end of the current 2.03 – 2.08 trading band.  However with the positive spin on the data on Wednesday in the UK (MPC Minutes) and the softening NZD we saw the GBPAUD rate push to the upper end of its band on Thursday and remain up at 2.08 for the rest of the week.

The CPI release in Australia coming out fractionally higher than expected in the middle of last week and the depreciation of its fellow commodity currency the NZD on Thursday heralded a move to sell off Australian Dollars at the latter part of last week.

Despite the UK retail sales data coming out below par at the end of the week the GBPAUD rate has maintained its strength – the week ahead is dotted with data on both sides that has proved poor on occasions in previous months so we are going to play safe and expect the rate to pull back a fraction to sit within its band rather than test the upper reaches.

EURNZD

Having started last week at the peak since 2006 (EURNZD 2.0850) and with the advent of a possible interest rate cut in New Zealand there was always a good chance that the EURNZD could break higher still.  With the RBNZ’s decision on Thursday looming the rate didn’t disappoint and it pushed to the peak since 2001 – finishing the week at GBPNZD 2.1150.

Although it is easy to focus on the depreciating NZD we also have to look what’s happening in the Eurozone.  Wednesday saw the release of a poor industrial new orders figure which showed that the Eurozone is now certainly feeling the effects of the global slowdown.  Similarly Thursdays German IFO business climate figure fell well short of expectations instead marking its lowest level since September 2005.  The market was partly anticipating this after poor Eurozone GDP figures over previous weeks, and a poor ZEW survey two weeks ago.

Despite growth slowing in the Eurozone the EURNZD continues to move in the Euro’s favour.  How much further and higher this rate can go will be very interesting – the weakness to the NZD is evident but can the Euro maintain strength?

The coming week is a packed calendar in Europe, however that isn’t necessarily a good thing for the Euro – Consumer Confidence and Retails Sales will presumably come out weak and therefore any further gains against the NZD could be halted for now.

This week in Euro Calendar:
28th – German Consumer Confidence
29th – German CPI (July)
30th – German Retails Sales (June), European Consumer Confidence (July), European Economic Confidence (July) and European Industrial Confidence (June)
31st – German Unemployment rate (June) and Unemployment change (July), European CPI (July), European Unemployment (June)
1st August – German PMI Manufacturing (July), European PMI Manufacturing (July)

EURAUD

The EURAUD rate started the week at 1.6270 and then the general trend was a steady rise through the week finishing at the peak on Friday of 1.6440.  This is the top end of its current trading band (1.61 – 1.65) and is the peak for 3 months.

Again like GBPAUD this pairing mimicked that of the EURNZD’s movements – the latter part of the week seeing the demise of the NZD and subsequently the dragging down of the AUD with it.  Investors in the carry trade may well have temporarily lost their appetites for the investment thus heralding a sell off in AUD.  However with a busy coming week in both Europe and Australia economically speaking the movement will likely be less one sided.  We expect the Euro to ease back a bit on last week’s gains but still maintain reasonable pressure given that most of the market will have priced in poor data coming from both sides.

NZDUSD

At the start of the week NZDUSD continued to trade in the 0.76’s – a level we have come to see as familiar territory over the past month.  However with the RBNZ meeting on Thursday and a relatively quiet week for the US by its standards the rate gained some downward momentum pushing back the NZD to the low since this time last year – finishing on 0.7420.

The early part of last week saw the US Dollar maintain strength as fears over the state of the US financial situation diminished and oil prices were allowed to fall.   The USD seems to have found some solid ground, not only because we are seeing the odd bit of positive data but because the European economic picture is deteriorating rapidly and investors may seek to invest in the USD again.

Although the movement in the US’s favour may be slow over coming months few would argue at present that gains will not be made against the kiwi.  Analysts are suggesting we could see the NZDUSD rate in the high 0.6’s before the year is out – however a lot is reliant on no further skeletons coming out of the US’s sub prime closet.   On the short term there is a lot of data out at the end of the week in the US, we are going to stick our neck out and suggest that the exchange rate could weather whatever is released and should maintain the gains made last week.

US Economic calendar:

29th – Consumer Confidence (July)
30th – ADP Employment Change (June)
31st – GDP (Q2), Personal Consumption Expenditure (Q2), Chicago Purchasing Managers Index (July)
1st August – Average Earnings (July), Average Weekly Hours (July), ISM Manufacturing (July) Non Farm Payrolls (July) and Unemployment Rate (July)
AUDUSD

AUDUSD started the week trading at 0.974 and looked set to continue its run on the USD and head towards parity, especially as the threat of Hurricane season looms over the US.  However last week very much belonged to the greenback as the general trend from Tuesday onwards was downwards.  The rate finished the week at AUDUSD 1.9540.

The USD is starting to find a firm footing and the Fed’s hawkish rhetoric of late (Both FOMC voting members Plosser and Stern have cautioned about inflation expectations, saying the Fed should begin raising interest rates sooner rather than later) is necessary in keeping inflation expectations anchored.  Moreover while they continue to discuss raising interest rates the market will continue believing it might happen before the year is out.  However it is more likely to occur next year following a run of improved data as the US domestic data such as the housing sector is still in a weak state.

Given that the RBA’s next move could be to cut interest rates and the Fed could in time raise we imagine that the rate may pull back from the recent peaks and settle back into the low 0.90’s or even high 0.80’s.

AUDNZD

At the outset of last week the AUDNZD rate was trading at the peak since 2000 and the RBNZ’s decision to cut the OCR rate meant the rate pushed higher still.  Starting the week at AUDNZD 1.28, peaking on Thursday at 1.2940 and finishing at 1.2860.

Analysts have suggested that a move towards the mid 1.3’s is on the cards given that the RBNZ are likely to continue to cut the OCR rate over coming months.  However with the Australian economy slowing rapidly as well it may struggle to go any higher.

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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.

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