NEWS / Foreign Exchange

Carry on, carry trade

NZD trades to post float highs following CPI

Yesterday morning the NZ Q1 Consumer Price Index was released with a headline number of 0.5% for the quarter. This saw an initial sell off in the NZD as expectations were for 0.6%. These losses were quickly reversed when the non tradable inflation figures printed higher than expectations, which is what the Reserve Bank has been monitoring closely. The NZD climbed to post float highs of 0.7493 and remained buoyant for the remained of the day before been sold back to a low of 0.7382 overnight on rumours of a carry trade unwind. This morning sees the NZD fully recovered to open around 0.7470.

AUD nears in on 84 cents

The AUD was relatively quiet in yesterday??™s local session with a lot attention on NZ CPI data. The only data out of Australia yesterday was the Westpac consumer sentiment survey which showed sentiment fell 0.2% in April. A narrow range was traded during the day of 0.8357-.8374 with the rumours out of Japan of a carry trade unwind overnight causing the AUD to plummet to a low of 0.8315. The AUD has however recovered back to new highs this morning of 0.8385.

Carry on, carry trade

The USD took another beating yesterday with all the major currencies managing to make gains against the ???big dollar??™. Negative USD sentiment and potential interest rate hikes in Europe and Asia-Pacific meant further demand for the high yield currencies and, by consequence, most major currencies posted further gains. The euro posted a 30-month high and the Sterling, already at a 26 year high, rallied to 2.0134. Recent USD strength against the Japanese yen subsided on Wednesday, USD/JPY trading at 118.11 a two-week low. Markets now focus on the host of US economic data out today and the monetary policy implications for high yield currencies over the coming days.

No major US data.

UK labour market report for Feb/Mar. Unemployment fell for the six month running in March on the benefit claimant measure (??“9k). However the broader household survey, which also captures those looking for work but who don??™t qualify for the dole, such as recent immigrants, rose 21k in the three months to February (the latest available). The same survey also showed employment falling in that period, by 47k. Given these developments, the relatively subdued 3.6% yr growth rate for core earnings in Feb is no surprise. True, this year??™s bonus payments, especially in the City, lifted total earnings growth to 4.6% yr (and will be supportive of consumer spending), but it is the core earnings growth rate that feeds into the Bank of England??™s medium term inflation projections. So a mixed report that does not really add to the already near-certain case for a May rate rise.

The minutes to the April Bank of England monetary policy committee meeting showed a 7:2 vote with the dissenters to the onhold decision favouring a rate rise. The American on the committee who voted for a rate cut in March sided with the majority in April, whereas the two hawks who voted for a hike back in February renewed their call. What??™s more, the on-hold voters noted that ???any change would be better explained in the context of the May inflation report??? which suggests that even before this week??™s jump in CPI inflation, a May rate rise was on the cards.