The kiwi plunged by more than 1.2% against the US dollar in the early Asian trading session after the Reserve Bank of New Zealand proposed to tighten mortgage lending rules in a step to curb the overheated housing market and pave the way for more monetary policy easing in August.
Although the inflation rate has remained below 2% since 2012, house prices have skyrocketed by almost 50% in the past 6 years, which is seen as a major risk to the financial system if prices are due to correct. The new proposal will not only control prices from further booming, but will allow the bank to cut its official cash rate further below 2.25%, and I believe this step could come as early as August 11 when the central bank meets next.
The Aussie was the second biggest decliner today, dropping by 1% against the greenback. The minutes revealed from RBA’s July meeting, at which they kept interest rates unchanged at 1.75%, showed the central bank is not really worried about Brexit, as it is expected to have only a modest adverse effect on global economic activity.
The RBA minutes indicated that: “Members noted that the direct effect (of Brexit) on the Australian economy was likely to be quite small, given that only around 3% of Australia’s exports went to the United Kingdom and around 4.5% went to the rest of the European Union.”
Investor’s focus will shift to Australia’s Q2 CPI release on Wednesday July 27, as only a weak release could trigger a rate cut in August, considering that policymakers are less worried about what is happening in Europe.
Overall I remain bearish on the commodity currencies bloc as Fed members are slowly building up expectations to tighten this year, and softer commodity prices will only increase the pressure on high yielding assets.
The pound has been moving in a relatively tight narrow range early today after it received a boost Monday from the announcement of a large M&A deal between telecoms group Softbank and ARM Holdings (LON:ARM), which to some extent reassured the markets that the U.K. could still attract foreign direct investments even though it is departing from the EU.
A start of a busy U.K. data calendar kicks off today with the release of June’s CPI, PPI, and ONS house price index. Although the figures won’t reflect the full impact of the Brexit vote, bears are on standby to jump in if data surprises to the downside. I still prefer shorting rallies on GBP/USD for a potential dip below 1.3 in the short term.
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