NZD benefits from RBNZ comments, Wall Street surges

Summary:

• New Zealand dollar leads the gains following comments from a RBNZ official
• Aussie gets the weak GDP report, Australian PMIs mixed
• Wall Street surges after comments from Fed’s Powell

Kiwi extends gains

The morning in Europe welcomed us with the stronger NZ dollar, a rebound in Asian equities and slightly higher US bond yields. Beginning with the currency market, the NZD strength has come from a speech delivered by a RBNZ official Christian Hawkesby in Tokyo last week but it was released by the NZ central bank on Wednesday. He said that the central view is that interest rates in New Zealand would remain broadly around current levels for the foreseeable future. Let us remind that the RBNZ cut rates to a record low last month and pointed to some space to deliver yet more expansionary monetary policy in the forecast horizon. As a result, the market-based probability of future rate decreases jumped and the kiwi was sent to the lower levels. Since then a lot has changed, this is especially true when it comes to recent days as they have seen the weaker US dollar and as a consequence a livelier rebound in Antipodean currencies. Although Hawkesby pointed to rather a small probability for subsequent rate cuts, he also added that the central bank needed to be ready to adapt to changing conditions so as to meet its objectives even with confronted with unforeseen developments. The NZDUSD has risen 1.6% thus far this week.

The NZDUSD has been rising this week on the back of the weaker greenback. The first obstacle ahead of bulls might be found nearby 0.6680. Source: xStation5

Australian GDP disappoints

In terms of macroeconomic released there is no doubt that Australian GDP stole the show during Asian hours trading. The report showed that the Australian economy expanded at a moderate pace of 0.4% QoQ, below expectations pointing to a 0.5% QoQ increase. In annual terms the rate of growth was 1.8% and matched market expectations. What do the details look like? First of all, private consumption was, another time in a row, the prime driver of growth adding 1 percentage point to a YoY GDP increase. Almost the same positive contribution came from public consumption (0.95pp). What could be a bit worrisome is the fact that the annual rate of private consumption growth fell to 1.8% from 2%, the lowest since mid-2013. The annual rate of growth of gross fixed capital formation fell to -1.5% from 0.7%, the lowest since mid 2016 and this category deducted 0.4pp from growth. Finally, net exports contributed positively and added 0.5pp. Taking into account the current attitude of consumers one may expect that they could be willing to save rather than spend any additional income. If so, this would be a positive information for the future as it would increase their’ capacity for higher expenditure, however, it would also mean a fading private consumption contribution to current GDP. Moreover, the Australian economy is still witnessing a slump in labour productivity with gross value added for each hour worked declining 0.9% YoY in the first quarter. Overall, the report seems to justify the latest RBA decision to slash borrowing costs.

The Australian economy expanded below expectations in quarterly terms during the first three months of the year. Source: Macrobond, XTB Research

Wall Street bounces back

The US equity market saw an impressive rebound on Tuesday after the lacklustre beginning of the week. The NASDAQ (US100) jumped 2.6%, the SP500 (US500) rose 2.1% and the Dow Jones (US30) also gained 2.1%. This bullish performance came after Federal Reserve Chairman Jerome Powell suggested the central bank stood ready to buttress the domestic economy if developments related to trade wars deteriorated. While his appearance did not turn out to be a breaking one, market participants got a confirmation that the Fed would not sit on its hand if economic growth stuttered. Looking at market-implied odds for rate cuts one may notice that market participants are almost certain the Fed will cut rates by September, assigning 94% for such a scenario.

Technically the US500 got back to the important technical area it broke down last week. Therefore, a further price action should depend on how the price reacts currently. Source: xStation5

In the other news:

• World Bank cut its global GDP projection for 2019 to 2.6% from 2.9% citing a tumble in business confidence, a deepening slowdown in global trade and sluggish investment in emerging and developing economies

• Chinese services PMI for May fell to 52.7 from 54.5, composite PMI slipped to 51.5 from 52.7

• Chinese equities are trading only slightly higher despite the excellent performance seen on Wall Street

• Australian services AiG index jumped to 52.5 from 46.5, CBA index for services fell to 51.5 from 52.3, CBA composite fell to 51.5 from 52.2

• US 10Y yield has rebounded slightly in recent hours and trades at 2.104% this morning