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    IronFX Daily Commentary | 23/07/15

    23.07.2015, 9am

    RBNZ cuts rates, says further easing likely; NZD gains The Reserve Bank of New Zealand (RBNZ) cut rates by 25 bps overnight and said that “some further easing seems likely.” This was a stronger easing bias than last month, when they said that “(w)e expect further easing may be appropriate” depending on the data. Nonetheless the NZD gained as the market had put a 34% probability on a 50 bps cut. Furthermore, the statement was less aggressive on the NZD valuation. “The New Zealand dollar has declined significantly since April..,” the RBNZ observed. “While the currency depreciation will provide support to the export and import competing sectors, further depreciation is necessary given the weakness in export commodity prices.” The call for “further depreciation” is not as strong as in June, when the Bank said that “a further significant downward adjustment is justified.”

    • Nonetheless, I think they are likely to see some “further depreciation” in NZD. The steep fall in the price of milk products, New Zealand’s major export, has worsened the country’s terms of trade. Furthermore, NZD remains highly overvalued on some measures of purchasing power parity (PPP), although to be fair it is slightly undervalued according to the OECD’s methodology. (It’s also a very cheap place to buy a Big Mac, if you like Big Macs.) I look for further depreciation in the currency at least vs USD and perhaps even vs AUD as well.

    • Other commodity currencies ease Aside from NZD, the other commodity currencies fell. CAD for example was the worst performing of the G10 currencies, while among EM currencies, BRL fell and USD/MXN extended further into record high territory as oil continued to decline and many other commodities, including agricultural commodities such as soybeans, fell. The unexpected rise of 2.5mn barrels in US crude oil inventories in the latest week despite a small decline in oil output depressed oil prices and oil-related currencies. No sign of a change here in the near future!

    • GBP best performing currency On the other hand, GBP was the best performing G10 currency after yesterday’s Bank of England minutes showed an increasing split on the Monetary Policy Committee. “There were, however, differences of view as to how significant the increases in domestic cost pressures had been,” the minutes said. “For some, they were no more than a part of the increase that would be necessary in order for inflation to rise sufficiently to meet the 2% target after the commodity-related factors that were temporarily depressing it had waned. For others, it appeared as though domestic cost pressures had risen more quickly than expected which, combined with the view that spare capacity in the labor market was close to being exhausted." This suggests we could soon see some votes in favor of tightening.

    • Today’s highlights: During the European day, Sweden’s unemployment rate for June is expected to increase somewhat. PES unemployment rate for the same month increased a bit, showing the potential direction of the official rate. Coming on top of the further dip into deflationary territory in June, the deteriorating fundamentals justify Riksbank’s decision at its 2 July meeting to cut interest rates further. An increase in the unemployment could add to these soft data and weaken SEK.

    • In the UK, retail sales for June are forecast to accelerate. Following the acceleration seen in wages in April and May, retail sales could show some improvement. This may add to the positive sentiment towards the pound given the rate hike expectations and push sterling higher against its peers.

    • From the US, we get the initial jobless claims for the week ended July 18 (survey week for the July NFP figures). Using our simple analysis of the value of the four-week moving average of jobless claims against the NFP figure, the latest figure (283k) would imply a NFP figure of some 260k – quite a robust number. Separately, the Chicago Fed National activity index for June and Conference Board leading index for June ae also due to be released. The latter is expected to decelerate from the previous month.


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