FX Update: RBNZ In Focus

Key Points:

• Soaring inflation forecasts are threatening to throw world economies into recession
• Japanese Manufacturing for May 53.2 vs prior 53.5
• China is showing further support for Russia and wants to erode dominance of the US Dollar as sanctions ramp up
• NZ first Q Retail Sales -0.5% vs expectations of 0.3%- last Q 2021 was 8.6%
• Fed’s Bostic is calling for a 50 point rise in September is inflation is still high
• According to ECB’s Villeroy, a rate hike in the near term is probably a done deal
• Russia is studying a peace plan to the Russia/Ukraine war proposed by Italy
• Banks slash China 2022 growth forecasts from 4.2% to 3.0% as economy contracts
• The Euro (EUR) is the strongest currency this week with the United States Dollar (USD) the weakest.
• Iron ore bounces off 122.00 lows back to 132.00 assisting the AUD higher Read more

AUD/EUR Conversion:

After sitting around 0.6665 (1.5000)  for most of last week the Euro (EUR) has been better bid this week coming from 1.4870 (0.6725) during early Monday sessions to 1.5060 (0.6640) this morning with German Producer prices printing at their highest level since figures began. This shows resilience in the economy despite higher inflation, recession concerns and the war in Ukraine. Technically we predict further strength to develop in the EUR as the bear trend continues through to meet the 100-day moving average at 0.6580 (1.5200). Lagarde speaks tomorrow.

Current Level: 0.6631 (1.5080)
Resistance: 0.6755 (1.5330)
Support: 0.6525 (1.4800)
Last Weeks Range: 0.6615-0.6717 (1.4887-1.5117)

AUD/GBP Conversion:

The Australian Dollar (AUD), British Pound (GBP) has traded sideways over the past fortnight, pivoting around its current price of 0.5650 (1.7700) for much of the time. UK Inflation rose from 7.0% in March to 9% in April y/y, its highest level since 1982 prompted by huge price rises in electricity and fuel costs but the biggest rise came from housing costs and utility expenses up 19% putting the squeeze on real consumer spending. If we see inflation go above 10% for a sustained period in the coming months, the forecast cash rate peak of 1.25% in 2022 will look more like 3%. It’s a thin docket this week with just UK flash manufacturing tonight. We expect movement this week to stay within recent levels with small gains in the Pound possibly to 0.5620 (1.7800).

Current Level: 0.5634 (1.7749)
Resistance: 0.5805 (1.8120)
Support: 0.5520 (1.7230)
Last Weeks Range: 0.5612-0.5682 (1.7599-1.7819)

AUD/USD Conversion:

Scott Morrison has been defeated in the local Australian elections held over the weekend conceding to the Labour party and new Prime Minister Anthony Albanese. The centre left Labour party won 72 of the 76 seats needed for a parliamentary majority. This ends 9 years of leadership by the centre right Liberal party. The Australian Dollar (AUD) as predicted never really reacted to the headline. The Aussie was however bid off Monday’s open in response to US Dollar (USD) weakness and better bid equity markets. On the menu this week we focus on Fed chair Powell speaking tomorrow and FOMC minutes Thursday. We expect further upside to develop and a retest of the “fib” 50% retracement at 0.7200.

Current Level: 0.7076
Resistance: 0.7270
Support: 0.7000
Last Weeks Range: 0.6870-0.7072

NZD/EUR Conversion:

The Euro (EUR) has been better supported this week trading back to 1.6540 (0.6045) against the New Zealand Dollar (NZD) after falling to 1.6380 (0.6105) in early Monday trading. Pressure is on for the ECB to raise rates sooner rather than later with rocketing inflation in the region. Last week’s April’s inflation came in at 7.4% revised slightly lower than 7.5% but remains super high mainly due the ongoing energy crisis caused by the Russian invasion of Ukraine. German Producer prices printed at their highest level in years. The RBNZ will raise the cash rate tomorrow to 2.0% from 1.5%- largely already priced into the curve but it should give the kiwi a push post release. Technically the cross sits at the bottom of the fortnight channel with a bias to the upside, we predict 0.6135 (1.6300) to be retested.

Current Level: 0.6030 (1.6583)
Resistance: 0.6135 (1.6820)
Support: 0.5945 (1.6300)
Last Weeks Range: 0.5994-0.6076 (1.6456-1.6683)

NZD/GBP Conversion:

Retail Sales in the UK for the month of April improved 1.4% compared to -0.3% predicted coming after a fall of 1.2% in March figures giving the British Pound (GBP) strength against the New Zealand Dollar to 0.5110 (1.9560), the cross ending the week around 0.5130 (1.9490). Inflation jumped to 9% in April the highest level since 1982 following surging prices in electricity and other fuels. This compared to 7% in March and is a real worry for consumers. The only thing the bank of England can do in response is raise interest rates, if we see inflation clock 10%, we could see interest rates go to 3.5% by the end of 2022. On the calendar this week we have key Reserve Bank of New Zealand data with the rate announcement and policy statement. The RBNZ is expected to raise the cash rate by 50 points to 2.0% making it the highest since September 2016. We expect the cross to retest the 3-week high at 0.5210 (1.9200) levels this week.

Current Level: 0.5119 (1.9535)
Resistance: 0.5175 (1.9620)
Support: 0.5095 (1.9320)
Last Weeks Range: 0.5083-0.5138 (1.9460-1.9671)

NZD/AUD Conversion:

The New Zealand Dollar (NZD) inched its way higher over the course of last week against the Australian Dollar Dollar (AUD) to close at 0.9140 (1.0940). The kiwi still holds above key support at 0.9000 supported by better performing risk markets and prospects of the RBNZ raising rates. The RBNZ is widely predicted to raise the cash rate tomorrow from 1.5% to 2.0% to combat rising inflation, its second consecutive punch higher after raising in April. At 2.0% this will be the highest it’s been since September 2016. As inflation threatens to blow out of control the RBNZ will be carefully balancing rises with inflation forecasts with the ultimate goal of getting back to a “neutral policy” stance of 1-3% inflation target. The 2-year inflation expectation has risen recently to 3.29%. It’s a finely balanced algorithm, this “economy adjusting” – get it wrong and they could squeeze out growth and cause an economic recession. We don’t expect the cross to travel to far from the Roost this week.

Current Level: 0.9085 (1.0999)
Resistance: 0.9125 (1.1100)
Support: 0.9009 (1.0960)
Last Weeks Range: 0.9026-0.9100 (1.0988-1.1079)

NZD/USD Conversion:

Recession worries in the USA are at the front of conversation which led to a week of poor performance by the US Dollar (USD) over the past 7 days. The New Zealand Dollar (NZD) dominated moves Monday extending last week’s bull run from 0.6220 to reach a fresh high of 0.6490 before dropping into Tuesday to 0.6430. Risk conditions improved with equity markets and commodities mostly up. Odds are starting to improve for a global recession given massive inflation forecast and rate hikes to follow. Earning of late from retail giants Walmart and Target were down suggesting consumers have pulled back on discretionary items. The RBNZ will raise their cash rate tomorrow from 1.5% to 2.0% to combat rising inflation expected to be well over 7.0% at the July 17 read for the second quarter. For those buying USD don’t bank on the cross going higher in the medium to long term, to be honest current buy levels around 0.6400 look attractive.

Current Level: 0.6433
Resistance: 0.6530
Support: 0.6200
Last Weeks Range: 0.6230-0.6415

Economic Releases Calendar

Tuesday 24/05
All Day, CAD, Bank Holiday
4:15am, GBP, BOE Gov Bailey Speaks
7:30PM, EUR, German Flash Manufacturing PMI
Forecast: 54.1
Previous: 54.6
7:30PM, EUR, German Flash Services PMI
Forecast: 57.3
Previous: 57.6

Wednesday 25/05
4:20AM, USD, Fed Chair Powell Speaks
2:00PM, NZD, Official Cash Rate
Forecast: 2.00%
Previous: 1.50%
2:00PM, NZD, RBNZ Monetary Policy Statement
2:00PM, NZD, RBNZ Rate Statement
3:00PM, NZD, RBNZ Press Conference Read more

FX News This Week:

Key Points:

  • The stronghold southern port city of Mariupol looks to be in the hands of the Russian forces with the last remaining Ukrainian fighters to be evacuated from inside
  • Fed’s Evans calls for rates to be raised to 2.25%- 2.5% as fast as possible “front loading”
  • Chinese consumer focused firms are facing increased risk as demand softens, this was confirmed by recent plunging April Retail Sales and Industrial Production results
  • The European Central Bank has cut its 2023 economic growth forecast from 2.7% to 2.3%
  • BoE Bailey says 80% of inflation is due to prices rises in energy and tradable products
  • Crude Oil traded to its highest level since March 28th at 111.20
  • Canadian house prices click down as sales volumes drop
  • US Stock Indices are down 6 straight weeks
  • The Japanese Yen (JPY) is the strongest currency this week with the Australian Dollar (AUD) the weakest.
  • Iron ore bounces off 122.00 lows back to 127.00 assisting the AUD higher