NZD Firmer as RBNZ Signals Gradual Rate Hike Ahead

New Zealand dollar is mildly firmer after RBNZ left rates unchanged at 2.50% but said that the Official Cash Rate will be increased gradually over the next two years to offset rising underlying inflation as GDP growth picks up. The timing of rate hike, though, will be dependent on the pace of recovery. The bank noted in the statement that economic outlook has improved since publication of March statement. "Negative confidence effect" of the Christchurch earthquake has been "limited" in other parts of the country. Signs of recovery have "continued" and reconstruction in Canterbury will add 2% to GDP growth over 2012. Nevertheless, household spending will grow "only modestly" and activities will be dampened by fiscal consolidation. Strength of NZD will also negatively affect tradable sectors. "Underlying inflation remains constrained" so far.

 

Fed's Beige Book showed recovery slowed during the period. Dallas was the only region reported accelerating growth. Meanwhile, Philadelphia, New York, Atlanta and Chicago reported slowing in activities. Other seven districts reported steady growth. Consumer spending was up except in Richmond. Residential house prices were either down or steady in all districts. Labor market conditions continued to improve in most districts with only MInneapolis and St. Louis reported expected layoffs. However, wage pressure remains constrained. The labor market description was somewhat a relief considering the poor Non-Farm Payroll figure released last week.

 

Euro was soft today as traders are lightened positions ahead of tomorrow's ECB meeting. Trichet is expected to signal a July rate hike by using "vigilance" in the post meeting conference and that would be crucial on whether EUR/USD could regain strength for 1.5 psychological level. Sterling was mildly lower after Moody's warned of the possibility of rating outlook downgrade but loss was limited. The Japanese yen was firm on mild risk aversion. Dollar index stayed in tight range, together with crude oil and gold.

 

AUD/NZD's break of 1.2917 support confirmed that whole decline from 1.3792 has resumed. Near term outlook will remains bearish as long as 1.3181 resistance holds and further decline should be seen. Though, we'd expecting strong support from 1.2771 (61.8% retracement of 1.2090 to 1.3792 at 1.2740) to contain downside to finish the correction and bring rebound. However, note that sustained trading below 1.2740/71 will argue that whole up trend from 2008 low might have completed at 1.3792 already and could pave the way for 1.2 psychological level and below.