Brief Summary:
- The U.S. Federal Open Market Committee will hold their June monetary policy meeting early tomorrow morning AEST. Expectations are for tapering to continue and for no change to its current dovish forward guidance.
- The RBA released the minutes from its June interest rate decision yesterday.
- New Zealand will release its second quarter GDP figure tomorrow morning.
RBA minutes prompt AUD selling
Yesterday, the Reserve Bank of Australia released the minutes from its June monetary policy decision. The minutes for the decision to hold rates were viewed as slightly less optimistic and increasingly concerned about the high currency. The release caused the AUD to fall throughout Tuesday; after opening above 0.9400 it closed below 0.9350 against the USD.
Most notable was the addition of these sentences, “The earlier decline in the exchange rate was assisting in achieving balanced growth in the economy, but less so than previously as a result of its higher levels over the past few months. Members noted that the exchange rate remained high by historical standards, particularly given the further decline in commodity prices over the past month.” The AUD has been disconnected with the declining iron ore price which as hampered the share prices of miners like BHP, Rio Tinto and Fortescue. The chart to the right shows the iron ore spot price and the AUD in the last twelve months.
The board also displayed less optimising towards the latest capital expenditure figures that were widely viewed as strong by the market. They expressed some doubts about the figure stating, “Looking ahead, firms’ investment intentions implied that mining investment would fall quite sharply over the course of 2014/15, but the same survey pointed to a modest increase in non-mining investment over this period.” They also added their own findings, “In the Bank’s liaison, non-mining firms continued to report a reluctance to commit to significant new investment projects until they saw a sustained improvement in demand conditions.”
USD
Last night, the U.S. released the monthly Consumer Price Index (CPI) showing the recent inflation surge continued in May. Core CPI, the headline measure that excludes volatile items, increased by 0.3% after 0.2% was expected. This annualises well over the 2.0% target of the Fed but most pundits believe it is too early to result in a serious shift in their rhetoric. As a result, the market reaction to the figure was minimal awaiting tonight’s event.
The Federal Open Market Committee will meet early tomorrow morning AEST for their June monetary policy decision. The Fed’s dovishness in recent months has weakened the USD and allowed carry currencies like the AUD and NZD to flourish. With the outright employment growth and the unemployment rate now side-lined data, markets must now focus on the Fed’s interpretation of the economy. The shift away to softer data interpretation has driven low interest rate expectations, low volatility and hunt for yield as people stick to the rule of ‘Don’t fight the Fed’. This means that even though people think something, they will not put money behind it unless the Fed agrees. Currency markets should remain calm unless the Fed deliver a significant shift in language.
Fed-watcher Jon Hilsenrath posted a note today that implied long-term unemployment is set to remain the focus of the Fed in the near term. He cited a new study that found long-term unemployed were much more likely to be depressed.
NZD
New Zealand will release its second quarter Gross Domestic Product numbers tomorrow morning at 08:45 AEST. Expectations are for quarterly growth of 1.2%.
EUR & GBP
Chris Chandler