NZD ignores strong Q3 factory data that raises Q3 GDP expectations. OCR expectations dominate, with China trade data

By Kymberly Martin

Commodity-linked currencies have extended their under-performance.

Most European currencies have strengthened against the USD, with the exception of the GBP.

Weak performance of commodity-linked currencies has continued over the past 24-hours despite some stabilisation in the global oil price and commodities more broadly. Trade data for China (a large commodity importer) released yesterday, was soft, but showed some glimmers of hope. Soft China export data suggest that foreign demand remains subdued. However, China imports declined less than expected compared to a year ago, hinting at a policy driven pick-up in domestic demand.

The AUD showed limited direct response to the China data but continued on a fairly steady downward path, along with the CAD and NOK. The NOK now trades at its weakest level against the USD since early-2002.

The AUD/USD trades just above 0.7200, ahead of this week’s data highlight, the AU employment report, due tomorrow. Our NAB colleagues, and consensus, look for some payback in the November report following the staggeringly strong results in October. A negative employment outcome and tick up in the unemployment rate to 6.0% (from 5.9%), could keep the market considering a further RBA rate cut. Currently the market prices around a 70% chance of a 25 bps cut in the year ahead.

The GBP under-performed its European peers last night. A declining trend in the GBP/USD gained momentum after the release of disappointingly weak UK manufacturing data. However, the GBP/USD found support at 1.4960 overnight, before clawing its way back up to 1.5000.

The NZD/USD seemed fairly oblivious to the release of strong Q3 NZ manufacturing data yesterday morning. The data was enough to nudge our pick for Q3 GDP (released next Thursday) to 0.6%q/q (2.0% y/y) from 0.5% q/q (1.9%y/y) previously. Even with this upgrade we would be more surprised to see a sub 0.6% outcome than something stronger. Overall, this is consistent with our view that NZ activity remains solid even as inflation is subdued.

But for now it is all eyes on tomorrow’s RBNZ meeting. Although a close call, our core view remains for a cut. If delivered, this will likely see a knee-jerk step down in the NZD given it is far from fully priced. The extent of any pullback will be influenced by the RBNZ’s accompanying rhetoric. Although we see the Bank as very reluctant to cut the OCR below 2.50%, it may maintain a subtle easing bias. With no domestic data releases scheduled today, we may be in for a period of consolidation ahead of tomorrow morning’s meeting. Currently the NZD/USD trades at 0.6640.


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Daily exchange rates

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Kymberly Martin is on the BNZ Research team. All its research is available here.