Forex Investment and Currency Trading

FX Fundamentals: Risky assets fell back overnight, and as a result US yields fell and the JPY rose. But the USD was generally stronger against other currencies, particularly the NZD and AUD. NZD weakness was fully justified by very weak employment data, but the Australian employment numbers were still quite strong (even though the unemployment rate rose) so the AUD decline was more down to general risk negative sentiment than AUD fundamentals. Having said this, the AUD has traded strong to yield spreads in the last few weeks, so market would not expect any major recovery. Nevertheless, in the short run [...]

[Read more →]

NZ cash rates are a long way above real neutral

Reflecting increasing downside risk to activity stemming from a much weaker housing market, tighter credit conditions, and a deteriorating global growth backdrop, market brought forward the first rate cut to Q4 2008 from Q1 2009. An extra 50bp of easing next year is also expected, taking the cash rate to 6.25% by Q3 2009. In the face of continued above target inflation in 2008, 200bp of easing may look aggressive, but given that the real neutral cash rate is just above 5%, we would argue that such magnitude of easing is [...]

[Read more →]

In a relatively quiet week, all eyes will be on the Australian quarterly inflation numbers and the RBNZ decision.
Australia: In an otherwise quiet week finishing with the Anzac Day holiday, some of the suspense has been taken out of the quarterly CPI data on Wednesday because: (a) there is a pretty good forecast of the outcome from the monthly experimental inflation gauge; and (b) the RBA has already said: “CPI data for the March quarter…likely to show inflation of around 4 per cent … Underlying inflation … (is also) expected to rise.” That is, markets have already priced in a [...]

[Read more →]

In the previous two New Zealand recessions, falling house prices detracted significantly from annual CPI inflation. Today, the NZ housing market is already on the edge of deflation. House prices could fall as much as 30% from peak to trough. Even on conservative estimates, such a fall in house prices would knock more than 1 percentage point off annual CPI inflation and reinforces the view that the Reserve Bank of New Zealand (RBNZ) will be forced into easing rates sooner and more aggressively than the 90bps of cumulative cuts the NZ interest rate market is discounting over the next 12 months. [...]

[Read more →]