Kiwi accelerates following RBNZ rate hike

For the third consecutive month, the Reserve Bank of New Zealand raised its benchmark interest rates last Wednesday evening, this time to 3.25%. Not only is the RBNZ the first major central bank to begin raising interest rates since the beginning of the global financial crisis, but they offered strong indications that further interest rate hikes are likely to follow. Following that, the NZDUSD climbed to its highest valuation in over a month. It is widely expected that this coming Wednesday’s GDP release is set to show that the New Zealand economy is rapidly expanding at above a 3% annualised level, with 60% of economists already predicting a further interest rate hike in July.

Shortly following the news that a hawkish RBNZ raised interest rates, Australia released employment data which sent the AUDUSD just short of a yearly high. Although the Australian economy unexpectedly lost 5,000 jobs in May, the unemployment rate remained at a steady 5.8%, below the expected 5.9%. After analysing the data in deeper detail, it turned out that the employment contraction last month was enticed by a decline in part-time vacancies. In reference to full-time employment, over 20,000 jobs were created in Australia last month.

In a major market surprise, BoE Governor Mark Carney sent the GBPUSD narrowly close to a five-year high, following remarks made at a keynote speech in London. Carney enticed a sudden surge in demand for the GBP, after publically announcing that a UK interest rate rise could happen sooner than the markets expects. Previously, Carney talked down the prospects of a UK interest rate hike, stating that the BoE was in absolutely no hurry to raise rates. This news has again soared suspicions that the BoE may now raise rates this autumn. Also last week, the UK employment rate fell to a 5-year low.

Moving on to the United States, economic performances were mixed last week. The week started positively following the news that US Small Business Optimism reached its highest level in over 7 years last month. This prompted suggestions that small business hiring and expenditure will increase, further elevating the recent progress noted in the employment (initial jobless claims and non-farm payroll) and capital expenditure (durable goods and factory orders).

Unfortunately, Thursday’s advance retail sales figure failed to extend the chances of a USD rally. After consumer expenditure advanced to its second highest level in 5 years last month, it was hoped that this would correlate towards an i mpressive advance retail sales performance. Advance retail sales increased by only 0.3%, short of the 0.6% expectation.

Analysts were quick to decipher why we are not yet encountering additional consumer expenditure, despite the employment sector making substantial progress. So far, the consensus is that average wage growth is not yet increasing to the levels required. Average wage growth increased by 2.1% (annualized) last month, but economists predict that this figure needs to be around 3% before we witness appreciated consumer spending. In theory, with job growth now expanding at prerecession levels in the United States, this should correct itself. However, bearing in mind that the US economy is heavily reliant on consumer expenditure (70% GDP), patience for improved consumer expenditure releases will be thin.

Looking ahead, we have a variety of higher risk economic data released throughout the major economies such as EU CPI figures and the latest RBA minutes on the Australian economy indicating downside risks for the AUD.

Tuesday and Wednesday

are

the particular days of the week where a sharp increase in volatility is probable. Over these two days, we expect key data from the United Kingdom and United States. Starting with the U.K., the latest CPI figures are released with inflation a key benchmark for the BoE to consider an interest rate increase. Last month, the UK inflation level rebounded from a four-year low 1.6% to 1.8%. Since then, Services PMIs (main contributor to GDP) have expanded beyond expectations and UK retail sales growth reached a decade high. Any improvement on last month’s 1.8% CPI reading will likely extend demand for the GBP. A potential rally could extend into Wednesday’s now expectedly hawkish BoE minutes release.

Tuesday is also the start of the latest Federal Reserve two-day meeting. Although the FOMC decision on Wednesday is expected to be a further $10 bln taper of the Fed’s Quantitative Easing programme, there will be an added significance to this month’s Fed meeting because it is expected to be followed by an updated version of the latest economic projection, and a live press conference from Chair, Janet Yellen.

The media will be paying particular attention to Yellen’s tone, specifically any particular hints towards when the Fed may look to begin raising interest rates. Last month, Yellen confirmed that the Federal Reserve has begun discussing how they will raise interest rates, but added that no time frame for this has been discussed. Since the latest FOMC meeting, US economic data has been widely positive, apart from consumer expenditure. There is a suspicion that the Fed may pick up on this.