RBNZ Signals A Longer Pause In Monetary Tightening

The currency markets were busy overnight with the interest rate decision announcement from New Zealand, alongside the release of jobs data in Australia that showed a surprising record number of jobs being created in the Australian economy. The NZD/USD dropped to a fresh seven-month low (0.8180) as a result of the Reserve Bank of New Zealand (RBNZ) strongly signaling an intention to pause monetary tightening for an extended period, and now another rate hike is not expected until the first half of 2015.

The associated monetary statement was more dovish than anticipated, with the RBNZ lowering inflation forecasts as well as repeating calls for a weaker currency. Lowering inflation forecasts is a crucial indication that further monetary tightening is off the table for now, with inflation being seen as the main catalyst behind rate hikes in the first place. From here, the chances of a rate hike from the RBNZ are low for the remainder of this year and this should weaken the attraction of the Kiwi. I expect the Kiwi will gradually continue lowering in valuation, with further support levels located around 0.8159 and 0.8138.

An unusual employment report from Australia overnight led to confusion among investors. The latest data from the Australian Bureau of Statistics disclosed that an incredible 121,000 jobs were created by Australia last month – much higher than was expected. When this data was announced, the Aussie moved as high as 0.9216, but is now trading as low as 0.9174 at the time of writing. Although this is a truly incredible jobs report, only 15,000 appear to be full-time jobs and the significance surrounding so many part-time jobs being created has resulted in this data being not as clear cut as it would seem on first glance.

As there are no further major economic announcements from Australia for the remainder of the week, and as long as today’s US Initial Jobless claims doesn’t surprise the market, Aussie buying pressure should continue to cool down. Potential support levels can be located at 0.9149 and 0.9125.

As expected, the GBP/USD has entered some sort of consolidation phase. Bank of England Governor Carney’s comments that the first interest rate hike for the UK is likely to occur around Spring 2015 has prevented the unexpected slide the Cable experienced over the past week going any further, but at the same time Spring is a substantial distance away, therefore investors have not rushed towards the Pound either. The GBP/USD concluded Wednesday’s trading at 1.6209.

No economic indicators are released in the UK today, meaning any updates surrounding the upcoming Scottish referendum will be the main catalyst for fluctuations in the Cable. The referendum is now only one week away and I would expect this period of uncertainty to prevent the GBP/USD from rallying to the upside. Wednesday’s high (1.6229) is likely to be seen as resistance, with support around 1.6209 and 1.6140.

The EUR/USD concluded trading at 1.2916 and appears to be teasing a trading range between 1.2960 and the current yearly low (1.2858). This potential trading range will be tested on Thursday afternoon though, when Mario Draghi gives a keynote speech in Milan. It is hoped Draghi will provide some clarification regarding the ECB surprise last week. The prospect of a dovish Draghi appearing and vindicating exactly why the ECB acted so unexpectedly should put pressure on the EUR/USD, where potential support can be found at 1.2883 and the present yearly low, 1.2858.

Following comments from Koichi Hamada, advisor to Prime Minister Shinzo Abe, that a weak yen is “positive for Japan’s economy”, the USD/JPY continued its run to the upside. The pair concluded trading on Wednesday at 106.838. The pair is attempting a move towards the next resistance level on the weekly timeframe (107.210) and although I see the potential to extend above this level in the near future, the rally could fall just short for now. An upcoming speech from Bank of Japan (BoJ) Governor, Kuroda on Friday morning potentially repeating that the BoJ’s monetary goals remain in reach and no further stimulus is required from the central bank should prevent further JPY weakness for the time being.


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