Markets see lack of concrete action from RBNZ as sign it'll find it harder to make August rate cut; NZD nears parity with AUD following rating downgrade; UST 10yr yield at 1.39%; oil and gold down; NZ$1 = 72.2 US¢, TWI-5 = 75.9

Here’s my summary of the key events overnight, with news the New Zealand dollar spiked and is continuing to gain following Spencer’s speech and Australia’s rating downgrade. 

The Deputy Governor of the Reserve Bank, Grant Spencer, yesterday announced tighter LVR rules are on the way, but didn’t pin anything down for definite. The Kiwi has since gained nearly 1 US¢ and is creeping closer to parity with the Aussie dollar. The market seems to believe a lack of concrete action to calm the raging housing market, makes it harder for the RBNZ to justify a rate cut next month. 

Westpac economists disagree, saying the high dollar already presents a serious challenge to the RBNZ’s forecasts of a return to the inflation target, so any further gains in the currency will only add to the case for lower interest rates. ANZ’s economists say they technically still pick an August cut, yet it’s a delicately balanced situation as there are no guarantees a cut will weaken the dollar, but it’s pretty certain it’ll add fuel to the housing fire. 

A parity party could be on the cards, as the New Zealand dollar hovers at around 96.6 AU¢. The RBNZ’s announcement aside, the Aussie dollar took a knock yesterday afternoon, following Standard and Poor’s switching Australia’s outlook from stable to negative, in a warning that its AAA rating is under threat. The ratings agency has said the outcome of the country’s election has hampered its prospects of improving its budgetary performance. ANZ’s chief economist Cameron Bagrie has tweeted he still reckons the New Zealand/Aussie dollars will hit parity. 

Over to the US, new data shows private sector employment grew more than expected in June. The ADP Employment Report shows the service sector recorded gains while the goods sector saw losses. The growth was led by an increase in small-business jobs, while large multinationals appeared to be struggling a bit, with the Brexit not expected to help. Markets will be paying close attention to the US Labour Department’s non-farm payrolls report out tomorrow.

The UST 10yr yield remains low at 1.39%. 

The 1-5 year NZ swap curve opens in negative territory today. At 2.24%, the 1-year swap rate is now 2 basis points higher than the 5-year rate (2.22%). This particular swap curve has not been this negative since October 2008.

The price of oil has dropped to a two-month low, as the US’s weekly Energy Information Administration disappointed markets. The US benchmark oil price has dropped US$2 overnight to US$45/barrel, while the Brent benchmark has sunk US$3 to US$46/barrel.

The gold price is down to US$1,358/oz.

The NZ dollar has risen nearly 2 AU¢ to 96.6 AU¢, and is up nearly a cent to 72.2 US¢ and 65.3 euro cents. The TWI-5 index has jumped 100 points to 75.9.

If you want to catch up with all the local changes from yesterday, we have an update here.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

Daily exchange rates

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for(i=0;i

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