Global Markets: 

  • Reserve Bank of New Zealand Rate Decision: 3.00%, Expected: 3.00%, Previous: 2.75%
  • RBNZ: it is going to assess the impact of the high exchange rate on inflation pressure
  • RBNZ: it sees inflation pressure increasing over the  next 2 years
  • RBNZ: that Year to March GDP grew 3.5%
  • RBNZ: the extent of future rate hikes depends on data
  • RBNZ: current exchange rate not sustainable, and inflation pressures are increasing
  • China CB Leading Economic Index (MAR): 1.2, Previous: 0.9
  •  Japan CSPI (y/y): 0.7%, Expected: 0.8%, Previous: 0.7% 

FX Flows/Orders: 

  • AUD/NZD was sold by fast money names overnight, triggering stops around 1.0775
  •  Dealers saw again demand for CAD/JPY from Japanese names
  •  USD/CAD – solid bids seen towards 1.10; stops building through 1.0970
  •  USD/JPY – two-way flows with exporters selling the pair, while buying in the Yen crosses supported
  •  EUR/USD – banks see a good amount of bids resting between 1.38 and 1.3780; large stops through 1.3775 and 1.3770. Hedge funds noted sellers pre-1.3850 yesterday. Draghi speech at 10:00 GMT key event for Euro today.

 Market Sentiment:

 The Reserve Bank of New Zealand increased the cash rate to 3.00%, as unanimously expected by economists and financial markets. In its statement, the RBNZ reiterated the main message that the OCR is set to rise over the next couple of years. Also as expected, the press release acknowledged two important downside developments since the March MPS

(1) The RBNZ said export commodity prices remain very high, but it acknowledged that auction prices for dairy products had fallen 20% recently.

(2) The high exchange rate seemed to shift higher in importance. The bias sentence this time was “The speed and extent to which the OCR will be raised will depend on economic data and our continuing assessment of emerging inflationary pressures, including the extent to which the high exchange rate leads to lower inflationary pressure.” By comparison, back in the March MPS the exchange rate was not mentioned in this context.

However the RBNZ’s acknowledgement of recent low inflation outturns was quite low key. It reiterated that headline inflation is moderate now, but inflationary pressures are increasing. This was enough to spark a bounce in NZD/USD from 0.8585 to highs above 0.8620. Markets are also divided on the July rate decision, currently priced at 3.34%.

Upcoming Events: 

  • ·         09:00 GMT – German IFO Business Climate Index (110.5)
  • ·         09:00 GMT – German Business Expectations (105.9)
  • ·         10:00 GMT – ECB President Draghi speaks in Amsterdam
  • ·         13:30 GMT – US Initial Jobless Claims (310k)
  • ·         13:30 GMT – US Durable Goods Orders (2.0 %)
  • ·         13:30 GMT – US Core Durable Goods Orders (0.6 %)