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Rates on hold - Kiwi drops after dovish monetary policy statement

By OFX

The New Zealand Dollar remained below the US 70 cent handle in trading yesterday and remained rangebound in the lead up to the latest RBNZ cash rate decision. As expected this morning interest rates were left on hold at 1.75% and unchanged since November 2016. Opening yesterday morning at 0.6970, the Kiwi eventually topped out at 0.6995 heading into the European session.

The potential to push back through the US 70 cent mark was quickly erased this morning after RBNZ Governor Adrian Orr released his first monetary policy statement since coming into power on the 27th March. Remarks on softer inflation levels and a downgrade in GDP growth saw a more dovish statement than expected and thus delaying any expectation of higher moves for the official cash rate till Q3 2019.

The Kiwi immediately gapped lower and was sold off in droves as we saw a low this morning of 0.6926. Orr remarked that the next move for rates could equally be up or down.RBNZ Governor Orr is due to testify shortly before the Finance and Expenditure Select Committee in Wellington with the latest Monetary Policy Statement to be at the forefront of discussions. Traders will be anxiously looking to pick up on any further clues following his dovish statement. The New Zealand Dollar opens this morning at 0.6935.

The Australian dollar edge marginally higher through trade on Wednesday bouncing of supports and 11-month lows as investors took stock and profits. Having fallen to intraday lows at 0.7413 the AUD rebounded to touch session highs at 0.7470 buoyed by short term and mid-level USD profit taking amid sessions lacking any real headline macroeconomic data events. Investors looked to cash in on recent USD upside however a rise in 10 year and 2 year treasury notes beyond all important 3% and 2.5% handles capped losses and ensured the AUD’s recovery was largely muted.

The AUD appears to be entering a new broader range with fair value sitting at or near 0.74 and upward gains capped on moves toward 0.7580/0.76. Having broken supports at 0.7430 yesterday there is now scope for the AUD to shift lower and break toward 0.7380.

Attentions now turn to key central bank commentary from the RBNZ and BoE for a view to broader global inflation expectations.

The Great British Pound is again slightly weaker this morning when valued against the US Dollar. The Pound Sterling reached an overnight low of 1.3499. All eyes today will be on the Bank of England’s monetary policy decision. Only a month ago investors were pricing in an almost a 90% probability of the Bank of England hiking rates in May however after a month of weak local data rates are expected to remain on hold.

Today we will also see the release the relevant monthly Industrial and Manufacturing Production figures. The GBP/USD pair is now currently trading at 1.3549. We continue to expect support to hold on moves approaching 1.3460 while now any upward push will likely meet resistance around 1.3570.

The USD managed to close almost flat on yesterday session, despite softer inflation (PPI) data. The Dollar Index was gaining more than 0.30% during Asian trading but reversed gains in London hours before the US data released and went into negative after the news to then recover some ground towards the end of the US session.

Today we will have US CPI report, with core inflation expected to increase to 2.2& year-on-year, a positive surprise could put more pressure in Treasury yields, the US 10-year Treasury is back at 3% and it has been increasing relatively more than the short end of the curve. US Jobless claims will also be released tonight, with the market expecting 219k (number of people that have filed unemployment claims).

The Euro was tracking well versus the Dollar before the US PPI data, with EURUSD climbing from low 1.18’s to around 1.1880 just before the release. It then managed to test the 1.19 level after PPI came slightly lower than expected.

Unfortunately for Euro bulls the currency pulled back during the US session and closed 0.1% weaker at around 1.1850. Going forward, the market will be paying attention to US inflation data tonight and a speech from ECB President Mario Drahi on Friday.

Increasing oil prices have been supporting the Canadian currency, and the spike in crude following the US decision to pull out of the Iran nuclear deal helped the loonie further. The CAD was one of the few currencies that strengthened versus the USD last night, gaining as much as 0.8% to close around 1.2850, its biggest one-day gain in a month. Also helping the CAD, Canadian government yields have been increasing, with the 2-year at an eight-year high. Also helping the CAD last night, building permits came much stronger than anticipated (3.1% vs 2.0% expected).

Going forward, traders will be watching the Housing Price Index release tonight and the Unemployment data this Friday.