New Zealand Dollar Could Sink Further on Declining Yield Expectations

http://www.dailyfx.com/forex/fundamental/article/drivers_of_price_action/2011/01/21/New_Zealand_Dollar_Could_Sink_Further_on_Declining_Yield_Expectations.html

NZD/USD

The outlook for the Kiwi took a hit following China’s GDP reading, as the 9.8% pace of growth exceeded expectations of 9.2% and fueled speculation for more tightening from the PBOC. The prospect of slower growth from the world’s second largest economy has dimmed the outlook for domestic growth for the export driven economy and lowered the prospect of further rate hikes from the RBNZ. Yield expectations continue to have an impact of NZD/USD, explaining 31% of direction. As a result commodity prices have started to lose the influence with recent movements showing a 40% correlation compared with 53% a month ago. However, costs for raw material have also been impacted by the potential for slower Chinese growth and has the pair re-coupling with broader trends. I expect risk trends to continue to have significant influence over the pair but domestic fundamentals are also potential drivers as we saw with the December retail sales figures.

Driver of Price Action	Current Influence	Correlation	Week Ago	Month Ago
NZD Interest Rate Expectations	Medium	0.31	0.26	0.35
USD Interest Rate Expectations	Low	-0.02	-0.03	-0.19
Commodities (RJ/CRB Index)	Medium	0.40	0.33	0.53

RBNZ Interest Rate Expectations

An unexpected 0.2% decline in core consumer demand combined with the outlook for Chinese monetary policy has RBNZ interest rate expectation on the decline. Overnight Index Swaps are now pricing in 57 bps of tightening over the next year significantly down from 95bps in November. Markets wee pricing in the future contribution to growth from earthquake rebuilding efforts. However, the natural disaster is expected to have a negative short-term impact on growth which would be amplified by slowing global demand for New Zealand exports. Policy makers will meet next week to determine future monetary policy with forecasts for the official cash rate to remain unchanged at 3.00%. A dovish outlook from Governor Bollard could drag the kiwi lower, but concerns over upside risks to inflation would potentially extend the current medium-term bullish trend. Discuss this and trading ideas join the NZD/USD forum.

Credit Suisse (OIS) RBNZ

Source Bloomberg – Prepared by John Rivera

FOMC Interest Rate Expectations

Fed fund futures are now pricing in a mere 3.8% chance of a rate hike by June as yield expectations continue to dim with the U.S. recovery expected to be slow. However, a significant drop in initial jobless claims and 12.3% jump in existing home sales are signs that the labor and housing markets are making positive strides. Markets will need to see further confirmation before the outlook for interest rates brighten, but it could bring an end to prevailing pessimism. There will most likely be little change in yield expectations before the FOMC rate decision ahead on January 26th.

Source Bloomberg – Prepared by John Rivera

Commodities

Commodity prices are slightly higher on the day as they continue to reverse yesterday’s sell off as the prospect for Chinese tightening dimmed. Strong earnings from GE and a record high in German investor confidence helped set a bullish tone for the day which has benefitted prices for raw materials. A rising trend line on the RJ/CRB index has been supportive and could limit downside risks for prices and the kiwi. A potential wedge is developing which would warn of a breakout with risks tilted to the upside given the longer-term bullish trend. Discuss this and other fundamental data in the Economics Forum.

RJ/CRB Index (1 Day)

Charts created using Strategy Trader– Prepared by John Rivera

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com

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AUD/USD: Trading the Australia Consumer Price Report

http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2011/01/21/AUDUSD_Trading_the_Australia_Consumer_Price_Report.html

Trading the News: Australia Consumer Prices

Why Is This Event Important:

Price growth in Australia is expected to expand at a faster pace in the fourth-quarter, and the rebound in inflation could spark a sharp rally in the exchange rate as investors speculate the Reserve Bank of Australia to tighten monetary policy further this year. According to Credit Suisse overnight index swaps, market participants are pricing at least one more 25bp rate for the next 12 months, and the inflation report could spur a rise in interest rate as the rebound in economic activity gathers pace.

What’s Expected:

Time of release:01/25/2011 0:30 GMT, 19:30 EST

Primary Pair Impact :AUDUSD

Expected: 3.0%

Previous: 2.8%

Will This Be Market Moving (Scenarios):

Consumer prices are forecasted to grow at an annualized rate of 3.0% in the fourth quarter, while the core rate of inflation is projected to increase 2.6% following the 2.5% expansion during the three-months through September. As price pressures intensify, the RBA may adopt a hawkish tone for future policy, but we expect the central bank to retain its wait-and-see approach throughout the first-half of the year as Governor Glenn Stevens sees inflation expectations “consistent” with its medium-term target for price growth.

The Upside

As consumer inflation expectations widen to the highest level since August 2008, with businesses facing rising commodity prices, firms are likely to pass on higher costs onto consumers as the rise in economic activity gathers pace. A marked rebound in price growth could lead the AUD/USD to retrace the decline from earlier this month, and the exchange rate may work its way back above parity as investors expect the RBA to tighten monetary policy further this year.

The Downside

However, as the expansion in global trade cools, businesses may show an increased willingness to absorb higher costs as households cope with rising borrowing costs paired a slowdown in job growth. Accordingly, a slower pace of price growth could instill a bearish outlook for the Australian dollar, and the exchange rate may extend the decline from earlier this month as interest rate expectations falter.

How To Trade This Event Risk

Expectations for higher inflation certainly encourages a bullish outlook for the Australian dollar, and price action following the release could set the stage for a long aussie trade as investors speculate the RBA to tighten monetary policy further this year. Therefore, if the CPI advances to 3.0% of higher in the fourth-quarter, we will need a green, five-minute candle following the report to establish a buy entry on two-lots of AUD/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to lock-in our profits.

In contrast, businesses may keep a lid on consumer prices as the rise in borrowing costs drags on private sector activity, and a smaller-than-expected expansion in price growth would allow the RBA to maintain a neutral policy stance as it aims to balance the risks for the region. As a result, if the headline reading for inflation misses expectations for holds flat from the third-quarter, we will take the same approach for a short aussie-dollar trade as the long position mentioned above, just in reverse.

Potential Price Targets For The Event

Impact the change in Australia employment has had over the AUD during the last month

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
3Q 2010	10/27/2010 0:30 GMT	2.9%	2.8%	-101	-133

3Q 2010 Australia Consumer Prices

Consumer prices in Australia grew at an annual pace of 2.8% in the third quarter after expanding 3.1% during the three-months through June, while the core rate of inflation increased 2.5% amid forecasts for a 2.6% rise. A deeper look at the report showed prices for clothing and footwear increased 1.4% after holding flat in the second-quarter, with the cost of housing advancing 2.3%, while food prices slipped another 0.5% after contracting 0.3% during the previous period. Indeed, the Australian dollar tumbled lower following the weaker-than-expected inflation report, with the exchange rate slipping to a daily low of 0.9651, and easing price pressures could lead the Reserve Bank of Australia to maintain a wait-and-see approach in 2011 as it aims to balance the risk for the region.

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View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com

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