Inflation pressures and dovish FED combine to raise Kiwi

Domestic inflation pressures and dovish FED combine to take Kiwi higher.

By Garry Dean (Sales Trader, CMC Markets New Zealand)

June Business Confidence was released yesterday, and showed a massive drop to 42.8 in June from 53.5 in May, with the Activity Outlook falling to 45.8 from 51.0. The reading is hardly surprising given the strength of the exchange rate, and reflects the low levels of forward cover on exporter books at present. Throughout the year there has been a broad view among many commentators that a recovering US economy would see a strengthening US Dollar in the second half of the year, and this would result in a lower Kiwi. Exporters are anxious for such a decline in the Kiwi, but three pieces of US economic data last week have sent the US Dollar Index tumbling to near six-week lows, taking the Kiwi to 3-year highs of 0.8794 last Friday, with a new post-float high of 81.60 seen in the Trade Weighted Index. The weakness of the US Dollar is creating pressures globally, with GBP breaking above 1.7100 overnight, to trade at its highest level since October 2008, and Euro trading just shy of 1.3700.

A massive negative revision to -2.9% for US Q1 GDP last week, combined with a fall of 1% in May durable goods orders and a weak May consumer spending read saw some economists revising lower their US Q2 GDP forecasts. More importantly the market has looked at this data in conjunction with the continued dovish tones of FED Chairman Janet Yellen, and concluded that US interest rates are going to remain unchanged for a considerable period of time – perhaps well into the second half of 2015 before rate hikes are seen. With markets pricing-in a further 25 pt hike from the RBNZ in July, and one further before the end of the year, it’s not surprising to see the Kiwi continue to find support from global investors in search of yield.

Exporters seeking some respite will find little comfort from the findings of a Treasury report released to ministers yesterday. This highlights the demand pressures from surging immigration, and shows an economy operating near full capacity, with inflation pressures to build further through the rest of the year, requiring further monetary tightening from the RBNZ. The situation Governor Wheeler finds himself in is one experienced by many of his predecessors. He needs to increase the OCR to control non-tradeable inflation pressures to achieve price stability, but in doing so he is hurting an export sector low on forward cover, and feeling the effects of declining commodity prices. Having fallen 2.2% in May, the June reading of the ANZ Commodity Price Index on Wednesday will be watched with interest, as will Tuesday night’s fortnightly GlobalDairyTrade auction results.

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