RBNZ hawkish surprise, Powell testimony eyed

Overnight Headlines

*USD strengthened for a second day to its highest level since early April

*US equities retreated from record highs after strong CPI data

*RBNZ titled more hawkish than expected, NZD outperforms

USD rose 0.53% recording its best daily percentage gain in nearly a month. Tuesday’s inflation report showed US consumer prices in June rose by the most in 13 years. Focus now shifts to Chair Powell’s testimony today before Congress. EUR extended losses down 0.72% to 1.1776 while USD/JPY made gains for a third straight day above 110.50. NZD has jumped over 1% above 0.70 as the RBNZ announced a surprising end to its pandemic QE programme.

US equities pulled back after the stronger-than expected inflation report overshadowed a solid start to the second quarter earnings season. Asian shares have tracked Wall Street lower although the ASX is in the green even as Sydney extends its lockdown. Futures markets are pointing to a softer open in the US and Europe.

Market Thoughts – Has US inflation peaked? Hmmm

We asked this question yesterday and it seems prices pressures remain very much elevated. The annual rate of inflation is now running just below the 2008 oil spike at 5.4%. But the core rate is now 4.5% which it was last at in November 1991. Year-on-year comparisons should soon fade with the annual rates edging lower, but they are expected to remain well above the Fed’s 2% flexible goal. Further, the strong run of month-on-month prints makes it very difficult for the Fed to stick to its “transitory” message.

Chair Powell may need to answer this issue at his semi-annual testimony today. Demand is continuing to exceed supply with the stimulus fuelled economy rattling along. Hints of tapering are now expected with the Fed potentially having to bring their 2023 rate hike scenario forward.

Chart of the Day – AUD/NZD spikes lower

Markets are now fully pricing in a 25bps RBNZ rate hike by its November meeting after the bank’s hawkish policy statement. Its QE programme will end at the end of next week, surprising virtually everyone. Every meeting between now and November is “live” to some extent with August being a 50/50 event (with ANZ forcasting a move at that meeting for what it’s worth).  

AUD/NZD may be the best pair to play the central bank divergence theme. The Fed stays in charge in NZD/USD so it is probably more risky to chase the major. AUD/NZD is now approaching support with May/June lows above 1.06. This coincides with a Fib level of the December/March move. We may see some consolidation here with bears targeting the February lows near the next Fib level at 1.0531/41.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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