New Zealand Dollar Holds Near 6-Month Highs Ahead of Rate Decision
Posted 07-28-2010 at 10:06 AM by DailyFX
Tags currency trading, forex, new zealand
The New Zealand Dollar has risen nearly 5%, or 350 pips, since the last RBNZ rate decision. With markets widely expecting another rate hike, can the Kiwi repeat the same stellar performance this time around?
Reserve Bank of New Zealand (RBNZ)
Weekly Update
The Reserve Bank of New Zealand is widely expected to raise rates by 25 basis points to 3.00% in today’s policy decision meeting (See Analyst David Song’s report on trading the RBNZ interest rate decision). In the previous meeting, the central bank said that further rate hikes will be reviewed “in light of economic and financial market developments.” While there has been evidence that economies around the world may be experiencing a slowdown of some sorts, markets believe that the RBNZ will continue its rate hike campaign regardless. There is a high probability of a 25 basis point hike at the July 28th meeting. Furthermore, markets expect 128 basis points of rate hikes from the RBNZ over the next year, the same as last week.
Reserve Bank of Australia (RBA)
Weekly Update
Interest rate expectations crumbled in step with the Aussie Dollar after consumer price inflation for the second quarter came in lower than expected. Year-over-year, CPI inflation rose 3.1% versus the 3.4% expectation. The month-over-month figure was 0.6% versus the 1.0% expectation. Prior to the release of the data, markets were pricing in 27% chance of a rate hike in the August RBA meeting, but after the release, the implied probability fell to zero. Market expectations with regard to rate hikes over the next year halved, falling to 14 basis points from 28 basis points.
European Central Banmk (ECB)
Weekly Update
ECB government bond purchases continue to wind down. The central bank bought 176 million euros worth of bonds in the latest week, down from 302 million euros in the week before that. In total, bond purchases have totaled over 60 billion euros since the bond purchase program began on May 10th. The yield on 10-year Spanish government bonds, a good indication of stress in European sovereign debt markets, was last trading at 4.14%, down 20 basis points week-over-week and down 74 basis points from the mid-June highs.
Continued improvement in sovereign debt markets and successful (some would argue meaningless) results of the long-awaited European Stress Tests sent ECB interest rate expectations modestly higher. Overnight index swaps are pricing in 45 basis points of hikes over the next twelve months, up from slightly less than 30 basis points last week.
Swiss National Bank (SNB)
Weekly Update
The EUR/CHF exchange rate continues to rebound off recent all-time lows. At just under 1.38, the pair is comfortably above those 1.3072 lows, which is undoubtedly encouraging to the Swiss National Bank. All else equal, a rising EUR/CHF exchange rate is positive for SNB rate hike expectations, as a weaker Swiss currency has a stimulative impact on the economy. Nevertheless, the Swiss currency remains at historically elevated levels. Market rate hike expectations are up about 8 basis points week-over-week to 29 basis points over the next twelve months.
United States Federal Reserve (FED)
Weekly Update
The latest week of Fed news was relatively uneventful. Recall that last week, Chairman Ben Bernanke spooked markets after he characterized the economic environment as “unusually uncertain.”
Federal Reserve Bank of Phildadelpha President Charles Plosser recently said that he sees no reason for the Fed to further stimulate the economy at this time. The Fed’s Beige book set to be released later today.
Market expectations for future Fed rate hikes remain extremely depressed with the first hike expected in August of 2011 according to Fed Funds futures.
Bank of Canada (BOC)
The Bank of Canada raised the benchmark overnight interest rate 25 basis points to 0.75% last week, as was widely expected. The central bank sees the global economic recovery as “proceeding but not yet self-sustaining.” Given the weaker profile for global economic growth and the consequent impact on Canadian trade, the BOC downgraded its outlook for GDP growth to 3.5% in 2010, 2.9% in 2011, and 2.2% in 2012. Inflation is expected to be well-behaved near 2% throughout the projection period. The central bank believes that “considerable monetary stimulus remains in place” even after the latest rate hike, but “any further reduction of monetary policy stimulus would have to be weighed carefully against domestic and global economic developments.” Market interest rate expectations soared following the policy meeting, with 106 basis points of hikes expected over the next twelve months.
Bank of England (BOE)
The minutes of the July Bank of England policy meeting were released last Wednesday: The central bank felt that prospects for GDP growth had “probably deteriorated a little over the month.” The bank went as far as to say “…the medium-term outlook for growth might have weakened too.” With regard to inflation, the BOE felt that “near-term prospects had worsened” and that “inflation is likely to remain above the target level for some time.” Nevertheless, the Committee’s central view remained that “the substantial margin of spare capacity [in the economy] was likely to persist for some time and would bear down on inflation over the medium term.” Based upon the minutes, the Bank of England is likely to maintain interest rates at current levels into next year, for upside risks to inflation are balanced by downside risks to the economy. Overnight index swaps suggest that there will be no rate hikes over the next year.
Bank of Japan (BOJ)
Last week Bank of Japan Deputy Governor Yamaguchi commented on recent developments. Yamaguchi says that the BOJ needs more time to assess the impact of the strong Yen on businesses, and that there may be an effect on exports. Though he declined to comment on intervention, many market participants believe that the BOJ may enter the market to weaken the Japanese currency, were it to fall much further. That being said, the USD-Yen exchange rate remains close to 15-year lows.
Reserve Bank of New Zealand (RBNZ)
Weekly Update
The Reserve Bank of New Zealand is widely expected to raise rates by 25 basis points to 3.00% in today’s policy decision meeting (See Analyst David Song’s report on trading the RBNZ interest rate decision). In the previous meeting, the central bank said that further rate hikes will be reviewed “in light of economic and financial market developments.” While there has been evidence that economies around the world may be experiencing a slowdown of some sorts, markets believe that the RBNZ will continue its rate hike campaign regardless. There is a high probability of a 25 basis point hike at the July 28th meeting. Furthermore, markets expect 128 basis points of rate hikes from the RBNZ over the next year, the same as last week.
Reserve Bank of Australia (RBA)
Weekly Update
Interest rate expectations crumbled in step with the Aussie Dollar after consumer price inflation for the second quarter came in lower than expected. Year-over-year, CPI inflation rose 3.1% versus the 3.4% expectation. The month-over-month figure was 0.6% versus the 1.0% expectation. Prior to the release of the data, markets were pricing in 27% chance of a rate hike in the August RBA meeting, but after the release, the implied probability fell to zero. Market expectations with regard to rate hikes over the next year halved, falling to 14 basis points from 28 basis points.
European Central Banmk (ECB)
Weekly Update
ECB government bond purchases continue to wind down. The central bank bought 176 million euros worth of bonds in the latest week, down from 302 million euros in the week before that. In total, bond purchases have totaled over 60 billion euros since the bond purchase program began on May 10th. The yield on 10-year Spanish government bonds, a good indication of stress in European sovereign debt markets, was last trading at 4.14%, down 20 basis points week-over-week and down 74 basis points from the mid-June highs.
Continued improvement in sovereign debt markets and successful (some would argue meaningless) results of the long-awaited European Stress Tests sent ECB interest rate expectations modestly higher. Overnight index swaps are pricing in 45 basis points of hikes over the next twelve months, up from slightly less than 30 basis points last week.
Swiss National Bank (SNB)
Weekly Update
The EUR/CHF exchange rate continues to rebound off recent all-time lows. At just under 1.38, the pair is comfortably above those 1.3072 lows, which is undoubtedly encouraging to the Swiss National Bank. All else equal, a rising EUR/CHF exchange rate is positive for SNB rate hike expectations, as a weaker Swiss currency has a stimulative impact on the economy. Nevertheless, the Swiss currency remains at historically elevated levels. Market rate hike expectations are up about 8 basis points week-over-week to 29 basis points over the next twelve months.
United States Federal Reserve (FED)
Weekly Update
The latest week of Fed news was relatively uneventful. Recall that last week, Chairman Ben Bernanke spooked markets after he characterized the economic environment as “unusually uncertain.”
Federal Reserve Bank of Phildadelpha President Charles Plosser recently said that he sees no reason for the Fed to further stimulate the economy at this time. The Fed’s Beige book set to be released later today.
Market expectations for future Fed rate hikes remain extremely depressed with the first hike expected in August of 2011 according to Fed Funds futures.
Bank of Canada (BOC)
The Bank of Canada raised the benchmark overnight interest rate 25 basis points to 0.75% last week, as was widely expected. The central bank sees the global economic recovery as “proceeding but not yet self-sustaining.” Given the weaker profile for global economic growth and the consequent impact on Canadian trade, the BOC downgraded its outlook for GDP growth to 3.5% in 2010, 2.9% in 2011, and 2.2% in 2012. Inflation is expected to be well-behaved near 2% throughout the projection period. The central bank believes that “considerable monetary stimulus remains in place” even after the latest rate hike, but “any further reduction of monetary policy stimulus would have to be weighed carefully against domestic and global economic developments.” Market interest rate expectations soared following the policy meeting, with 106 basis points of hikes expected over the next twelve months.
Bank of England (BOE)
The minutes of the July Bank of England policy meeting were released last Wednesday: The central bank felt that prospects for GDP growth had “probably deteriorated a little over the month.” The bank went as far as to say “…the medium-term outlook for growth might have weakened too.” With regard to inflation, the BOE felt that “near-term prospects had worsened” and that “inflation is likely to remain above the target level for some time.” Nevertheless, the Committee’s central view remained that “the substantial margin of spare capacity [in the economy] was likely to persist for some time and would bear down on inflation over the medium term.” Based upon the minutes, the Bank of England is likely to maintain interest rates at current levels into next year, for upside risks to inflation are balanced by downside risks to the economy. Overnight index swaps suggest that there will be no rate hikes over the next year.
Bank of Japan (BOJ)
Last week Bank of Japan Deputy Governor Yamaguchi commented on recent developments. Yamaguchi says that the BOJ needs more time to assess the impact of the strong Yen on businesses, and that there may be an effect on exports. Though he declined to comment on intervention, many market participants believe that the BOJ may enter the market to weaken the Japanese currency, were it to fall much further. That being said, the USD-Yen exchange rate remains close to 15-year lows.
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