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Daily Forex Commentary

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NZD weakens as the RBNZ cut rates

Thu, Jul 24 2008, 06:18 GMT
by Jyske Bank Team

Jyske Bank

Today’s comment

Majors & Scandies

By the Majors & Scandis Team

Overnight the Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate by 25 bps to 8.00% after having kept rates unchanged for a year. Market participants had been split on the outcome of the monetary policy meeting as the central bank faces the difficult dilemma of an economy headed towards recession and rapidly rising inflation. However in a statement the central bank said that it expects the downturn in activity to gradually dampen the inflationary pressure and that rates are likely to be lowered further. Thus NZDUSD dropped and broke through the June lows around 75.00. Short term we expect that the (somewhat surprisingly) dovish statement from the RBZ will put the distressed NZD under further pressure. Thus we recommend selling NZDUSD targeting 72.40 with a stop loss placed at 75.50.

Yesterday minutes from the July monetary policy meeting in the BoE were released. The minutes showed that 7 members of the Monetary Policy Committee had voted in favour of keeping rates unchanged at 5% while one member wanted a rate cut to support growth and another wanted a rate hike in order to curb inflation. The minutes showed that the decision had been difficult for all of the MPC members and that the majority of the members felt that keeping rates unchanged at 5% in the current environment would send a sufficiently strong signal of the BoE’s determination to put a lid on inflation. Furthermore the MPC said that a change in rates this month would be a surprise at a time when markets remain fragile and that a rate hike under the current circumstances would add to the downward momentum in the economy. However market participants seemed to take special notice of the phrase “any changes in rates would be better communicated alongside the Bank’s August inflation report”. This phrase was obviously interpreted in the sense that the MPC doesn’t rule out further rate hikes in the future and the GBP strengthened substantially versus EUR. For the time being though, we expect EURGBP to find support around 78.00 and from a macro economic point of view we still expect that the next move in rates will be down. Thus we prefer to maintain a neutral stance on the GBP for now.

Emerging Markets

By the Emerging Markets Team

Yesterday was a positive day on EM mainly attributed to further declines in the oil price. Most currencies ended the day marginally up against EUR. The exceptions were the Easternand Central European currencies CZK, HUF, RON, and PLN. On Tuesday Czech central bank Governor Tuma made some rather dovish comments and CZK continued its new declining path yesterday. CZK has now lost 3.8 % since Tuesday and seems to be dragging PLN, HUF, and RON along with it on concerns that the tightening path in these countries will be over earlier than previously expected. Looking forward CZK could go either way – the currency could turn around again after recovering from the ‘shock’ or it could continue weakening from long CZK positions being closed - hence we maintain a neutral stance for now. The stop on our long PLN position was hit and we close the position with a comfortable profit.

In Brazil the SELIC rate was hiked with 75 bps to 13 %. Consensus was 50 bps, in line with our expectations, but a still larger group of analysts were expecting 75 bps. The wording following the announcement also changed from ‘continues the process of adjustment of the base rate’ to ‘promote the timely convergence of inflations to the targets’.
Hence the central bank has turned more aggressive in its fight against inflation, and this could provide support for BRL. Today there are no important events on EM.

Today’s Key Events

• 09:30 Producer prices (SEK)

• 09:30 Unemployment (SEK)

• 10:00 Ifo (DEM)

• 10:00 PMI service (DEM)

• 10:00 PMI manufacturing (DEM)

• 10:30 Retail sales (GBP)

• 14:30 Jobless claims (USD)

• 16:00 Existing home sales (USD)

• 01:30 CPI (JPY)

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Published on  Thu, Jul 24 2008, 06:54 GMT