fxmatters

The NZ dollar did generally rebound this week, primarily the result of the higher than expected 4.0% NZ inflation rate in the four quarters ending June, and hence reduced odds of an RBNZ easing 24 July. The NZD/USD even managed to top 77.5c at one stage (and the NZD/AUD top 79.2c).

Two thoughts arise: once again the advantage of placing orders to take advantage of any spike was displayed; and, second, the high inflation figure delays, rather than changes, the timing of any monetary policy easing.

The bigger picture is the local economy is in a slump and soon monetary policy will be eased. The current NZD rally – and any more should that emerge – present good selling opportunities. Market anticipation of a monetary easing is likely to build as we approach the next scheduled policy review on 11 September (with or without any rate cut next week).

Meanwhile one reason for the NZD/USD spike was the weak USD itself. Judging by the bias in option pricing, the market is fearful of even further USD weakness against the EUR. However it is not only the US economy (and NZ) that is slow at present. German business conditions are also slipping fast. Slow or negative growth in the big three economies of the US, Japan and the Eurozone make for ambiguous currency trends. It suggests some respect should be given to the significant bounce of the USD in the last day or two, and the significant drop of oil prices (recently associated with the USD trend).

The broad picture remains one of the EUR/USD trading sideways between $1.53-$1.60 approximately. It may be that the EUR/USD is in for a move towards the bottom of this range.

Put that possibility together with the soft local economy and conditions are shaping for the NZD/USD to finally fall back to the 70-75c range.