NZD

The broad themes remain unchanged for the NZD; a very weak domestic economy leaving the bias clearly downward.  The NZD remains under pressure against the AUD, EUR and GBP, but is stuck in its established range against the greenback.

In New Zealand last week the NZ Building Consents (May) total residential dwelling consents fell 45 percent.  Barfoot and Thompson Auckland House Sales (June) seasonally adjusted house sales rose by 15 percent and the average house price fell to $525,316 and is 7 percent off its early 2007 peak.  The ANZ Commodity Price Index (June) was up by 2.1 percent although the world price index was unchanged over the month.

New Zealand’s world export price index was flat in June, despite further gains in meat prices.  Dairy prices slipped a further 1.1% while forestry prices eased 3.1%.  However, all markets received a boost from the generally lower NZD during June, which lifted export prices, in local currency terms, by 2.1%.

At present as the world is buffeted by massive corrective forces, New Zealand is hopeful the structure of the local economy and its current policy settings, leave us well placed to avoid a very deep or protracted recession.  New Zealand has a safety net which is stronger than most nations of the world.  For a start, New Zealand’s presently tight monetary policy by the same token allows huge amounts of easing.  Also, the public sector balance sheet allows more fiscal flexibility than most.  However, there is little that we can do to avoid the pain of a short-term adjustment that has become necessary following a prolonged period of relatively reckless behavior by the household sector.  For both businesses and households alike, the trick right now is to batten down the hatches.

AUD

At the RBA meeting last Tuesday, the Board decided to leave the cash rate unchanged at 7.25 per cent.

Inflation in Australia has been high over the past year in an environment of limited spare capacity and earlier strong growth in demand.  In these circumstances, the Board has been seeking to restrain demand in order to reduce inflation over time.

As a result of earlier decisions by the Board, additional rises in market interest rates and tougher credit standards for some borrowers, there has been a substantial tightening in financial conditions since the middle of last year.  Conditions in international finance markets remain difficult, with credit concerns resurfacing in the past month.

Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation.  On balance, while the inflation outlook remains concerning, the Board’s assessment continues to be that demand growth will be moderate this year.  The most recent flow of information has given additional support to that assessment.  Inflation is likely to remain relatively high in the short term, and the CPI will be further boosted in coming quarters by the recent rises in global oil prices.  Looking further ahead, inflation in both CPI and underlying terms should decline over time, provided demand continues to evolve as expected.  Weighing up the available domestic and international information, the Board’s judgement is that the current stance of monetary policy remains appropriate.

The week ahead:

NZD

8th July – NZIER Business Opinion Survey (2Q)

10th July – Business NZ PMI (June)

AUD

8th July – NAB Business Confidence (June)

9th July – Westpac Consumer Confidence (July)

10th July – Consumer Inflation Expectation (July) and Unemployment Rate (June)

GBPNZD
The negative sentiment surrounding the UK economy at present was cemented more so by the data released last week.  UK Consumer Confidence is at a fresh 18 year low according to a GFK survey and with UK nationwide housing prices falling 6.3% y/y against 6.4% expected, this data offered little support and we saw the Sterling lose slightly what it had gained the previous week to end trading on Friday at GBPNZD 2.613.  The peak for the week was on Monday when it reached the mid GBPNZD 2.63’s.  This week all eyes are on the Bank of England Interest Rate Announcement on Thursday which is expected to remain at the same level of 5%, with a very outside chance of a raise to control the rising inflation (Mervyn King has voiced that this is the least preferred method to control inflation in the current economic situation so we deem a rise unlikely).  We could see some slight volatility in the market in Sterling’s favour leading to the decision but more than likely the rate will stay in the same channel of last week of GBPNZD 2.61 – 2.63’s.

Other data of note released in the UK is Mondays Industrial and Manufacturing Production, Tuesdays DCLG House Price Index and Nationwide consumer confidence and finally Wednesdays Goods trade balance and Shop Price index.

GBPAUD
Last week leading into the RBA’s interest rate decision Sterling gained momentum and reached the very early GBPAUD 2.09s on Tuesday but spent the rest of the week losing that gain and closing on Friday back in the GBPAUD 2.05’s.  Again as with the GBPNZD the main data to watch out for is the BoE’s interest rate announcement which is more than likely to remain unchanged.   On Australian shores the unemployment rate figures for June are out on Thursday, again economists expect this to be the same as in May.  If we see the results come in strongly negative for Australia hand in hand with negative Business Confidence (released Tuesday) and Consumer Confidence  data (Wednesday) the Sterling could get back up to the GBPAUD 2.07 -2.08 range by the end of the week.

EURNZD
As widely expected, the ECB raised the policy rate 25bps to 4.25% on Thursday.  In the accompanying press conference, ECB President Trichet said the move will “contribute to achieving our objective of long-term price stability”.  However, Trichet showed no inclination to raise interest rates again in the near-term and even went as far as to say “starting from here I have no bias”.  Last week’s ECB hike is likely to be the last in the tightening cycle and given the softening in the Eurozone activity we suspect the central bank will be content to reverse the move late next year once its convinced inflation pressures are contained.

Trichet’s shift to a neutral bias sent EURNZD downwards back to the 2.06 level after reaching the peak for the week on Thursday of EURNZD 2.092.  This week with little data upcoming from New Zealand emphasis is on the data released in the Eurozone.  German Industrial Production (May) on Monday and on Thursday the ECB publishes the July Monthly Report – if these results give little excitement we could see the rate this week stay between  EURNZD 2.06 – 2.07.

EURAUD
The ECB’s dovish tone weakened the EUR last week.  This came on top of data that confirms that the Eurozone is slowing economically.  The manufacturing and services sectors contracted in June according to PMI surveys.  Denmark is now in recession, the Spanish economy is weakening and the Irish economy also contracted in Q1.  The EUR opening strong on Monday at EURAUD 1.657 but post-announcement the EUR plunged later in Thursday’s session to EURAUD 1.635 and ended up closing on Friday back between the EURAUD 1.627 -1.63 channel.

Considering the data being released in the Eurozone is expected by analysts to be flat we would anticipate trading to continue between the EURAUD 1.63 – 1.65 band.

NZDUSD
The NZD remains stuck in its well established range against the USD as both economies remain very weak and the rate might very well be stuck in its recent range until the RBNZ enters its easing cycle.

Last week in the US, US non-farm payrolls dropped 62,000 in June (pretty much in line with analyst forecast of 60,000) and the unemployment rate remained steady at 5.5%.  While the dreary NZ economic outlook continues to weigh on the currency, the recent bout of USD weakness has provided some support for the strength of the NZD.  We suspect the NZDUSD will continue to tread water in familiar ranges of NZDUSD 0.75 – 0.76, over the very near term as both economies remain weak.  Bigger picture, the underlying trend remains firmly to the downside, although we’ll likely need some fresh impetus (in the form of either a rebound in the USD or some significantly weak NZ data) to drive the NZDUSD below 0.7445 (the June 13 low).

Data of note this week is on the US side – Consumer Credit and Consumer Confidence on Tuesday, Import Price Index, Trade Balance (May) and Michigan Consumer Statement on Friday.

AUDUSD
Last week the AUD dropped off leading up to the interest rate decision to AUDUSD 0.952, after the announcement from the RBA of no change to the rate, the AUD bounced back to an average level of AUDUSD 0.962 for the remainder of the week.

The data coming out of Australia this week is forecasted as being negative, this may have already been priced into the market.  However, if the unemployment and consumer confidence are significantly more negative than expected we could see the AUD weaken against the Greenback and trade back down slightly lower into the AUDUSD 0.95 band.

AUDNZD
The AUD has maintained its high levels against the NZD following the RBA announcement.  The AUD climbed two cents from Tuesday reaching early AUDNZD 1.27’s on Thursday.  Data wise this week, the major New Zealand piece of information is the NZIER Business Confidence out on Tuesday.  It is likely to reinforce the message present within the economy – sharply weaker growth, but still intense cost and inflation pressure.  As such it is unlikely to be too directional for the kiwi.  In Australia the labour market data is the most important development and if we see results more negative than expected the rate could fall slightly to trade back in the AUDNZD 1.24 – 1.26’s.

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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.

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