Getting the NZD retaliation in early

Investors offloaded the NZ dollar (NZD) on Tuesday, in anticipation that the Covid outbreak would discourage the RBNZ from raising its benchmark interest rate. They bought it this morning, after the RBNZ held back from raising the Official Cash Rate. They had got their retaliation in early, so there was nothing left to do.

The Reserve Bank of New Zealand’s decision was what commentators like to call a “hawkish hold”. While the OCR remains at 0.25% “for now”, the statement made clear that the bank is still minded “to further reduce the level of monetary stimulus” over time. Investors were left to assume at least one rate hike before the end of the year, so they saw no need to extend yesterday’s punishment. This morning, Reuters published a handy summary of the policy moves it expects from the RBNZ and some other major central banks.

The general risk-off feel of the FX market was similar to the previous couple of days. A safe-haven currency took first place for a fourth day; in this case the Swiss franc (CHF) shared the honour with the US dollar (USD). The Northern Scandinavian crowns (SEK and NOK) brought up the rear, while the pound (GBP) was in the back half of the field, down by an average of 0.2% and flat against the euro (EUR).

Economic statistics support the caution

Investors had to look carefully for positive surprises among Tuesday’s ecostats. Negative surprises were easier to find. The Eurozone’s gross domestic product (EUR) was alright, with 2% growth in Q2. US retail sales (USD) very much weren’t, falling by a monthly 1.1%.

Quarterly GDP growth in the Eurozone (EUR) varied from 0.4% in Lithuania to 4.9% in Portugal. Germany expanded by 1.5% and France by 0.9%. The overall picture was in line with forecast. The 1.1% monthly decline in US retail sales (USD) came as a surprise, almost four times as big as the forecast -0.3%. America’s NAHB housing market index (USD) was another disappointment, coming in at a 13-month low of 75. The retail sales number was paradoxically helpful to the USD, in that it made investors more edgy about the global economic picture.

A TV appearance by Federal Reserve Chairman Jerome Powell had no lasting impact on the dollar (USD). One of his contributions was that “It’s not yet clear whether the Delta strain will have important effects on the economy; we’ll have to see about that”.

Sterling (GBP) unaffected by inflation miss

Following the RBNZ announcement, the first big item on Wednesday’s list was the UK inflation data (GBP). Investors could see nothing exciting among the numbers. There are inflation figures later in the day from South Africa, Europe and Canada.

The classic UK consumer price index rose 2% in the year to July while the ONS’s preferred CPIH measure, which includes owners’ housing costs, was up by 2.1%. Both readings were lower on the month. Producer price inflation put manufacturers’ costs 9.9% higher on the year while factory gate prices rose 4.9%.

Analysts expect Eurozone headline inflation to be 2.2% while Canadian consumer prices should be 3.4% higher on the year. Tonight, Australia reports on employment. The best guess there is that 46k jobs were lost in July, with the rate of unemployment a tick higher at 5%.