RBNZ didn't mince words within economic update; NZD/USD falls sharply then consolidated at higher level; JPY surges on confirmation no need for helicopter money in Japan

By Kymberly Martin

The JPY has strengthened overnight while the NZD/USD is the weakest performer over the past 24-hours. European currencies experienced some volatility around the ECB’s statements.

It has been a fairly active 24-hours for currency markets. Yesterday morning the NZD/USD plunged following the RBNZ’s economic update.

The Bank did not mince its words. It said the high NZ TWI “makes it difficult for the Bank to meets its inflation objective”. For absolute clarity it stated “a decline in the exchange rate is needed”.

The NZD/USD promptly obliged, falling from 0.7020 to below 0.6960. However, it soon found its feet and has subsequently consolidated below 0.7000.

The NZ TWI is now 4% down from its early-July highs but still well above the RBNZ’s June MPS projections. Furthermore, if the recent decline is to be sustained the Bank will need to deliver two more OCR cuts in the not too distant future (given this is now priced).

Further downside to the NZD will likely need to be driven by global forces. Continued positive US economic surprises or a decline in global risk appetite could be catalysts.

We continue to look for further modest downside toward 0.6600 on the NZD/USD by year-end. Near-term, technical support remains at 0.6960.

Overnight, the EUR and the USD experienced a bout of volatility as ECB President Draghi spoke, accompanying the ECB’s policy decision announcement. While the EUR/USD briefly surged toward 1.1060 it has now settled near 1.1020.

The GBP/USD fell sharply last evening after the release of weak UK retail sales data for June. These would likely have been dampened by the uncertainty in the lead up to, and result of, the UK Referendum on EU membership.

The GBP/USD fell to briefly trade below 1.3160 before returning to 1.3200 currently.

The JPY surged higher around the same time. However, its move appeared to coincide with headlines from BoJ’s Kuroda stating there is “no need and no possibility for helicopter money”. Although the comments were recorded mid-June they were aired overnight. This threw cold water on recent speculation that this may be the only avenue of policy easing left to the Central Bank, as it fails in its aim to reignite inflation. The USD/JPY now trades around 105.90, from 107.00 last evening.

There are a handful of July PMI data releases due this evening which should provide some colour on whether activity has been dented in the wake of the late-June ‘Brexit’ vote.

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Daily exchange rates

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