Local eyes mostly on RBA comments which struggles to reconcile improving jobs data with other 'below trend' indicators. Oil lurches lower

By Raiko Shareef

The USD recovered most of yesterday’s losses, led by gains against commodity currencies, after oil prices took another lurch lower.

That has taken the AUD lower, despite some softening of the RBA’s rhetoric on the exchange rate.

The GBP continues to outperform, as the BoE edges closer toward taking action on interest rates.

The price of WTI crude oil is 3.5% lower today, and looks set to close below $50 for the first time in three months. US oil production continues to surprise analysts with its strength, contributing to a glut in global oil supply. As a result, oil-sensitive NOK and CAD occupy the bottom of the currency leader-board.

NZD and AUD suffered by association, on the view that further weakness in commodity prices would encourage more policy easing from the respective central banks. The profit-taking run on NZD/USD yesterday has been mostly reversed. All eyes on the RBNZ to provide fresh direction today. If the language is less gloomy than the market expects, we eye resistance at 0.6720. If the tone is grim, then the current cycle low of 0.6499 looks likely to break. Strong support lies at 0.6420.

The AUD had a whippy ride before finding its current lows, centred on RBA Governor Stevens’ speech yesterday, which covered a broad swathe of current policy issues. To be sure, the prospect of further rate cuts remains on the table, but seems increasingly unlikely.  Much of the Governor’s focus was on improving trends in the data, and the nagging question of how the Australian jobs market is improving with the economy ostensibly growing below trend. A number of explanations were floating (including the prospect that trend growth is lower than previously thought), but none singled out as the ‘right’ explanation. From this, our NAB colleagues see the RBA in a period of assessment and analysis, with the risk of further rate cuts very low.

The Governor sounded less bearish on the AUD than in the latest policy statement. Instead of stating that further depreciation is “likely and necessary”, Stevens simply noted that the AUD is “adjusting as you would expect”. We view the change in tone modestly constructive for AUD.

Elsewhere, the Bank of England Minutes revealed an MPC that is edging closer to rate hikes. As of July, “a number” of members think the balance the balance of risks are shifting to the upside for inflation – a notable uptick from the “two” members who thought the same at the June meeting. GBP/USD is up 0.3% overnight.

A flurry of mid-tier data events will pique the interest of investors overnight, but the marquee event for locals will no doubt be the RBNZ’s decision, in just over an hour.


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Daily exchange rates

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Raiko Shareef is on the BNZ Research team. All its research is available here.