Olympics takes attention from markets

By Mike Jones, Currency Strategist, BNZ

Olympic watching continues to take precedence over currency watching. It's been another forgettable night in global financial markets.

Thin volumes and a dearth of news kept most of the majors confined to narrow ranges. The NZD/USD drifted sideways inside 0.8120-0.8160.

Notably, NZD/USD one-month volatility (traded in the options market) is plumbing lows not seen since April around 9.3%.

However, the day ahead certainly has the potential to spur a bit of excitement and volatility.

First up, the NZ HLFS (10:45am NZT). We expect a drop in the unemployment rate to 6.4% driven by a 0.4% increase in employment and a drop in the participation rate to 68.6%.

After a brief look at NZ consumer confidence figures (1pm), all eyes will then be on the Australian jobs report (1:30pm) as a key test of the RBA's assertion growth is close to trend and employment growth is "moderate".

An employment result around the 10k analysts expect (NAB 15k) may see RBA rate cut expectations further pared, bolstering yield support for the AUD.

Last in the action-packed line up is the latest batch of Chinese data (1:30pm for CPI and PPIs, 5:30pm for retail sales, investment, and industrial production). The general tone of recent Chinese data has been encouraging. Perhaps as a result, analysts today expect the 'Goldilocks' outcome of broadly steady activity indicators but a further fall in Chinese inflation (to 1.7%y/y from 2.2% in June).

Such an outcome would be seen as paving the way for additional RRR and/or interest rate cuts from the PBOC - a positive for risk appetite and the 'commodity-sensitive' AUD and NZD.

There's also the Bank of Japan meeting to look out for. Despite a ramping up of government pressure on the BoJ to ease, the cash rate and asset purchase scheme are expected to be left unchanged.

Should today's run of data prove about as positive as we expect, the NZD/USD should continue to draw support from a high and rising NZ-US interest rate differential. Dips towards 0.8070 should be met with solid demand.


The drift higher in the major currencies ground to a halt overnight. Investors reigned in some of their risk appetite, underpinning a mild strengthening in the USD. That said, currency markets remain subdued and directionless overall.

The 'no news is good news' rally in risk assets faded a little overnight, as Spain returned to the headlines. The Spanish government said it will not ask for more aid if it comes with harsh austerity conditions. Recall that the ECB needs individual countries to apply for aid from the EFSF before it can act to lower peripheral yields. Worries the ECB's bailout plan has hit a stumbling block saw peripheral bond spreads widen and risk appetite gauges ease off their highs. Equity markets are flat to slightly down.

Against this less 'risk-friendly' backdrop, the EUR/USD gave up some of its recent gains, slipping ½ cent to 1.2350. The AUD/USD, NZD/USD and USD/JPY essentially shuffled sideways in familiar ranges.

As expected, the Bank of England's Inflation Report revealed the BoE has slashed forecasts for growth and inflation. Worryingly, the BoE sees UK growth two years ahead closer to 2%, from 2.7% in its May forecast. However, the GBP actually flew higher in response, after Governor King played down the chances of a rate cut (it was "neither here nor there"). From 1.5580, GBP/USD climbed to almost 1.5660. Our UK-based strategists do not see the GBP's rise as sustainable and look for EUR/GBP to head up towards 0.8000 over the coming weeks.