Kiwi ac­cel­er­ates fol­low­ing RBNZ rate hike

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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