FX market outlook

FX market outlook

Posted on Thursday, November 9 2017 at 9:20 am GMT+0000

Kiwi rallies as RBNZ signals faster inflation; aussie climbs on Chinese inflation

The kiwi recorded a strong rebound on late Wednesday, flying to a two-week high after the RBNZ left rates unchanged but raised expectations that future hikes might emerge earlier than anticipated. The aussie posted some gains early on Thursday as China, Australia’s main export partner, released stronger than projected annual CPI figures.

As it was mainly expected, the RBNZ policymakers decided to keep rates steady at a record low level of 1.75%. However, what pushed the kiwi higher was a statement highlighting that policymakers are anticipating inflation to reach the 1-3% RBNZ target a year earlier than expected, with the central bank’s governor, Grant Spencer, saying that “GDP growth will be fast for longer, inflation will be higher, the unemployment rate will be lower and interest rates may have to rise a bit earlier in 2019.” Moreover, the RBNZ claimed that fiscal stimulus from the new government would also support prices to run faster. The kiwi jumped to a two-week high of $0.6972 in the wake of the announcement and fluctuated near that level during the Asian session on Thursday.

Consumer prices in China increased by 1.9% y/y in October, recording the highest rise since February and beating the forecasts of 1.8%. In September the figure stood at 1.6%. Month-on-month prices slowed down by 0.4 percentage points to 0.1%, below the expectations of 0.2%. Annual growth in producer prices remained flat at 6.9%. Following the data, the aussie gained 0.28%, jumping to a session high of $0.7688 and being 0.14% up on the day.

In China, US President, Donald Trump, asked the Chinese President, Xi Jinping to further toughen his stance on North Korea, while regarding US-China trade relations, he said that the relationship “has not been a very fair one”. Back in the US, uncertainties around the progress of the tax legislation have not been resolved yet as the markets anticipate a Senate tax-cut bill to differ from the version agreed in the House of Representatives. Note that tax proposals from both the upper and lower chamber will be unveiled later today.

The dollar index retreated by 0.13% on the day to 94.74 as a decline in the US 10-year treasury yield acted as a drag on the dollar. Dollar/yen retreated by 0.32% to 113.50 as geopolitical risks turned investor’s focus to safer investments. Dollar/swissie fell by 0.23% to 0.9976. Gold moved up by 0.31% to $1,284.80 per ounce.

Japanese data on machinery orders were also in focus during the session, with the core measure surprisingly contracting by 3.5% y/y in September instead of rising by 1.9% as analysts forecasted. In August core machinery orders grew by 4.4%. The monthly gauge reached the biggest decline since June 2016, falling by 8.1% versus -1.8% expected and 3.4% seen in the previous month.

The euro climbed by 0.10% to $1.1605 after the release of encouraging German trade data, while the pound was in an uptrend on the back of a weaker dollar despite the forced resignation of the International Development Secretary, Priti Patel on Wednesday over her secret meetings with Israeli officials. Pound/dollar advanced by 0.24% to $1.3144.

Turning to energy markets, oil prices were mainly flat supported by ongoing supply cuts by OPEC and non-OPEC producers, although the EIA report showed that US crude oil inventories increased unexpectedly by 2.237 million barrels last week after falling by 2.434 million in the week ending November 3. WTI crude and Brent were trading around $56.85 and $63.54 per barrel respectively.