Hawkish RBNZ pushes NZD higher, Wall Street surges

Summary:

• RBNZ left interest rates unchanged and provided investors with a more hawkish statement

• Wall Street surged on Wednesday in response to the elections' results

• China reports lower than expected trade surplus in October

The Reserve Bank of New Zealand decided to keep interest rates unchanged in line with expectations but it also presented a more hawkish statement. One of the most noteworthy change was a removal of the line saying that the next rate move could be either up or down. Instead, the bank wrote that timing and direction of any future OCR moves (the main interest rate) remain data dependent. On top of that the path of interest rates was kept untouched until the end of 2020 seeing the beginning of rate hikes in the second quarter 2020 (a change from the third quarter this year).

Higher inflation and slower economic growth, the mixture present across many economies including New Zealand. Source: RBNZ, XTB Research

In terms of the fresh economic forecast the bank showed a steeper path for headline inflation especially for the next year. It also added that it reflects higher fuel prices suggesting that these revisions have rather an exogenous character (the RBNZ was not the first central bank revising its inflation forecasts to the upside on the back of higher energy prices globally). At the same time the bank outlined some upside risks to its inflation projections including the tight labour market (the most recent jobs report turned out to be amazing) and shrinking companies’ margins (the RBNZ takes into account a scenario when firms begin passing more costs on consumers leading to domestically driven price pressures). The bank also reiterated that longer-term inflation expectations remain anchored at their previous levels. The monetary authority also sees some downside risks for GDP growth (the forecasts were slashed) including ongoing trade tensions which increase risk to global. As far as the exchange rate the bank noticed that the weaker dollar will support export earnings. Looking forward one may expect some pass-through effects flowing from the NZD depreciation we have been offered in recent months. During the press conference Adrian Orr suggested that a language change in the statement does not mean rate cuts are off the table and added that the RBNZ would consider such a move if GDP fell short of projections (as shown above these projections were lowered hence the probability to miss these levels reduced as well). The market-based likelihood for rate cuts increased slightly. The first OCR rise is currently priced in for November next year which seems to be a bit too optimistics assumption (it creates a downside risk for the kiwi ahead).

The NZDUSD has had the amazing week thus far fuelled by the stellar employment data as well as the RBNZ decision. Technically the pair has approached its crucial resistance at 0.6820 which could be a hard nut to crack for bulls. Source: xStation5

Looking beyond the FX market one needs to mention the stock market in the United States. All major indices ended the yesterday’s session with solid gains with the NASDAQ (US100) surging 2.6%. The SP500 (US500) and the Dow Jones (US30) added 2.1% each. These gains corresponded to a profit-taking in the bond market with the 10Y yields almost crossing 3.24%. However, Asian markets have performed mixed. The Shanghai Composite is losing 0.2% while the Hang Seng (CHNComp) is moving up 0.75% as of 6:48 am GMT. The Japanese NIKKEI closed the day with a 1.8% gain. From the Chinese economy we also knew the newest trade data for October showing a trade surplus equal $34.01 billion compared to the consensus of $35.15 billion. Anyway, it means a solid gain from $31.7 billion seen in September. During the past month exports grew 15.6% YoY while imports picked up 21.4% YoY - both values came in well ahead of expectations. Local experts suggest that the excellent data for China stems from the increased orders before the tariffs hit, and therefore the trade figures are likely to show some stress in the upcoming months.

The Chinese index (CHNComp) is struggling with its major resistance nearby 10720 points and so far the bears have prevailed. A breakout of this level is necessary to allow buyers to push higher toward 11190 points. Therefore, the session on Friday could be remarkably important from this point of view. Source: xStation5

In the other news:

• Japanese machinery orders slumped 7% YoY in September missing the consensus of a 7.7% increase, at the same time trade balance came in at 323.3 billion JPY compared to 334.2 billion JPY expected

• German exports decreased 0.8% MoM in September while imports fell 0.4% MoM

• The US 10Y yield trades slightly below 3.23% this morning

• US Attorney General Jeff Sessions resigned under pressure of Donald Trump