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Kiwi rides roller coaster as local inflation is offset Fed comments

Published July 18, 2018

By Phil Lynch

The New Zealand dollar rode the currency roller coaster over the past 24 hours after a flurry market events caused significant intraday volatility. The kiwi benefitted overall, rising three quarters of a percent on a trade weighted basis. However, gains against the greenback were slowly eroded as markets shifted their focus to Fed Chair Powell’s testimony.

First up a recap on local data.

New Zealand Data

Statistics New Zealand Inflation Number

New Zealand’s second quarter prices rose by 0.4%, against expectations of 0.5%. The annualised number saw prices rise by 1.5%, vs expectations of 1.6% (and vs the previous number of 1.1%). So, prices are on the rise – but not quite as fast as expected.

RBNZ Inflation Numbers

Yesterday afternoon, the RBNZ released their own summation of inflation which includes a sectoral factor model number – in other words – the RBNZ’s own ‘common’ inflation gauge. This reading came through at 1.7% – the highest in seven years. Whilst still below the RBNZ’s 2% target midpoint, this was enough to drive the kiwi higher.

GDT Dairy Auction

Just to add more complexity to the equation – the GDT Dairy Auction saw prices drop by 1.7% overall. However, this fall was offset by a rise in New Zealand’s key export commodity of Whole Milk Powder, where prices rose by 1.5%.

Fed Chairman Deflects Trade Concerns

Federal Reserve Chair Jerome Powell delivered his testimony to the Senate Banking Committee overnight and struck a hawkish tone on the outlook for the US economy. Senators were exploring with Powell the impact of trade wars. However, Powell stated the US was on track for years more of steady growth and discounted the impact of trade wars.

On monetary policy, Powell was also upbeat stating the Fed “believes that – for now – the best way forward is to keep gradually raising the federal funds rate”.

Sterling Under Pressure

The NZDGBP achieved the largest 24-hour shift, rising by 1.0% since yesterday’s open. This was helped along when Theresa May’s government only narrowly won a vote on a trade bill before the British parliament, indicating the cracks are growing.

The Unemployment Rate provided little incentive for markets to jump back into Sterling, despite producing a solid result of 4.2%. Tonight’s focus shifts to CPI numbers.

RBA On Hold

The RBA released their meeting minutes yesterday, and the key message was clear – rates will remain on hold at 1.50%. Australian focus now turns towards tomorrow’s labour market report. Markets are expecting 17k new jobs to be added in June, with the Unemployment Rate on hold at 5.4%.