New Zealand Eases Policy

Analisi Giornaliera - 11/06/2015

Reserve Bank of New Zealand Cuts Rates 25 Basis Points to Meet Inflation Targets


Monetary accommodation continues to be the main policy tool of global central banks with New Zealand the latest developed economy to enter the fray. The RBNZ moved to cut rates in response to weakened growth from major trading partners like China and Australia as the country faces dimming economic prospects due to lower dairy prices and increased energy costs.

New Zealand Surprise Cut

The Reserve Bank of New Zealand took markets by surprise overnight after cutting the benchmark interest rate from 3.50% to 3.25%. This marks the first interest rate cut since 2011 when the Central Bank cut from 3.00% to 2.50% before hiking again in 2014. However, in the subsequent statement, RBNZ Governor Graeme Wheeler cited the weakness in dairy prices and rising fuel prices as the reason behind the latest policy shift. Taking into account these factors coupled with slowing growth in Australia and China, the RBNZ thinks that further interest rate cuts might also prove appropriate depending on how the situation unfolds and how inflation responds to the latest modification of monetary policy. To the South, Australian unemployment managed to show surprising gains overnight, with the rate falling to 6.00% from 6.10% in the prior period. The AUDNZD pair has soared on the data, rising over 300 pips in the last twelve hours.


Chinese Industrial Production Gains

An overnight reading of industrial production showed stronger than forecast expansion in Chinese industrial production with the figure rising to 6.10% annualized expansion versus 6.00% expected and 5.90% realized in the previous reading. Retail sales also expanded modestly, in-line with consensus estimates while fixed asset investment fell to 11.40% growth from the prior 12.00%. More important than the economic data was revelations that the Central Planners intend to double the size of the debt-swap with heavily indebted regional governments. The idea is to help these regions deleverage from debt and refinance so that they can again begin to borrow sustainably with some debt yielding in excess of 7%, nearly 300 basis points above current borrowing levels. However, if history is any reminder, the local municipalities are likely to return to the same strategies of borrowing cash off balance sheet in the shadow-banking sector. This could intensify the headwinds for the Chinese economy if left unchecked.


Crude Oil Production Rises Further

The Department of Energy data reported yesterday showed that crude oil production in the United States continued to expand, reaching a record 9.61 million barrels per day. While inventories may have collapsed the most in 11-months, dropping by 6.81 million barrels, the kneejerk reaction in prices was to the downside before rebounding to the upside late in the session yesterday. Nevertheless, risks remain acutely skewed to the downside with some predicting that OPEC will continue raising production to punish shale producers and protect market-share that has been generally eroded by surging US production. Even though producers raised substantial capital in the first quarter as prices tumbled, trying to catch the falling knife in valuations, they might have bought too soon as the Saudis pump at a record pace, hitting 10.33 million barrels per day in May. Brent prices broke out of the downward channel, possibly paving the way towards further gains.


AUDCHF Equidistant Channel Technical Setup

In spite of the Reserve Bank of Australia’s increasingly accommodative disposition towards monetary policy, the Australian dollar continues to benefit from higher interest rates and improved economic fundamentals. Even though the housing bubble is still not contained, relative to the negative interest rates experienced in Switzerland, the outlook for the Australian economy is substantially more robust when it comes to growth. The AUDCHF is presently trending higher in an equidistant channel exhibiting an upside bias as the Australian dollar benefits from confidence in the recovery. Ideal positions taken near the lower channel line are targeting the upper channel line as an exit. Should however, another round of global risk-aversion grip markets, AUDCHF prices could slip below the lower channel line, indicating a potential downside breakout.


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