FX Update: EURUSD heavy on big support, RBNZ hawkish as it holds.

RBNZ posts hawkish policy forecast even as it holds

The RBNZ failed to hike overnight as I suspected might be the case and explicitly linked its pass on moving rates to the Covid outbreak discovered just the day before the meeting. And it is a proper “outbreak” rather than the single case, as at least 10 cases have now been confirmed as of this writing. Other details emerging show how quickly the virus can spread and the fact that it has been genetically linked to strains in Australia suggest that the virus somehow made it through New Zealand’s quarantine perimeter. The coming days to couple of weeks will tell us whether New Zealand is able to bite the risk of a wider outbreak in the bud and the kiwi will trade with heavy exposure to headlines.

If the outbreaks takes on the scale of something like the Australian situation, we should expect a tightening of rate spreads expectations between the RBA and RBNZ and a much weaker kiwi. At this meeting, the RBNZ upgraded its monetary policy forecast (in its more than 50-page monetary policy statement) making it clear that it is ready to hike quickly if this Covid situation is kept under control. There was an interesting comment about housing possibly offering a counter to upside risks for the economy as well. Note that RBNZ Governor Orr will testify before a parliamentary select committee tonight.

Australia Q2 wage growth comes in weaker than expected and this will likely help to keep the RBA on the sidelines for longer, as it has specifically linked the timing of rate hikes (currently not expected by the RBA until 2024)with pressures from wage growth in a tightening labor market. In Q2, wages rose +0.4% QoQ and +1.7% year-on-year vs. +0.6%/+1.9% expected, respectively. 

UK activity number – to fade in September? A great England-based friend of mine noted that UK activity numbers are likely to look better for July and August than they should due to the difficulty of taking holidays on the continent from the UK (Italy requiring, for example, a 5-day quarantine for travelers arriving from the UK). Where outbound travelers outnumber inbound travelers traditionally.

Table: FX Board of G10 and CNH trend evolution and strength
No direction changes here, with USD strength picking up and AUD and especially NZD weakness deepening in the trend readings.

Table: FX Board Trend Scoreboard for individual pairs
The USD strength is spreading sufficiently to have USDCHF trying to flip to the positive today – could be a significant move there on the back of the FOMC minutes if the message moves long US treasury yields higher. Also note that EURNOK is flipping back higher, though the chart suggest a leg higher above 10.50 and weak oil prices are likely needed to threaten another significant squeeze to the upside. Note that the Norges Bank meets tomorrow (expected to hike at the September 23 meeting).

Upcoming Economic Calendar Highlights (all times GMT)

• 1230 – US Jul. Housing Starts
• 1230 – Canada Jul. CPI
• 1430 – EIA's Weekly Inventory Report
• 1600 – US Fed’s Bullard (non-Voter) to speak
• 1800 – US FOMC Minutes
• 2110 – New Zealand RBNZ Governor Orr before parliament select committee on Monetary Policy Statement
• 0130 – Australia Jul. Employment Change