RBNZ raises rates but NZD falls

Good morning

I listened to new PM Burnham as he spoke to the House of Commons for the first time since his appointment well over one month ago.  He does speak some sense at times, for example he mentioned the abject failure of our water companies, something regular readers will know is a constant bother of mine.  However I remain unimpressed with his idea of No 10 North and his plans for devolution of power which I can only think will bring increased spending and even more inefficiencies.  He is going to have to get a grip of spending pretty quickly. 

30 year yields are now at their highest level since March 1998, higher than the Truss/Kwarteng debacle.  It would be easy to blame this on Labour, yields were around 1.2% lower when they took power in July 2024, but they have been on the rise since the Covid era of 2020 so it isn’t all Labour’s fault.  And a quick glance at US and EU yields shows similar moves higher from 2020.  However UK 30 year yields are currently 5.89%, US 30’s are 5.3% and EU 3.85% so although we can give Burnham some leeway, the UK is clearly worse off than its Western counterparts.

GBP is broadly unmoved by these higher yields.  GBPUSD is currently 1.3495, led more by USD strength than anything.  In the crosses it sits around 1.1665 against EUR, 215.50 against Yen, and 1.8900, 2.3125 and 1.8790 against AUD, NZD and CAD.

The main mover of that bunch is NZD, which has weakened from yesterday’s 2.2920 area against GBP, while AUDNZD has pushed up to 1.2245, not far from the May highs around 1.2285 which in turn were the highest levels seen since 2013.  This follows the RBNZ rate increase of 25bps overnight which takes NZ rates to 2.75%.  The move was widely expected but it was RBNZ Gov Breman’s comments that further tightening is highly uncertain and that they are likely to assess the impact of this move before deciding on any other policy change that sent NZD lower.  This dovish shift puts RBNZ’s own rate projections below the levels the market had priced in prior to the meeting.  Although inflation is too high, RBNZ must factor in concerns over the economy and the employment market, with unemployment running at 5.6%m the highest level for eleven years.

Yen has had a bit of a move, pushing higher despite a generally stronger US dollar.  USDJPY has slipped from overnight highs of 160.40 to 159.50, led in part by some hawkish comments from BoJs Ueda who has hinted that a September rate rise is becoming more likely.  His colleague at the BoJ, Takata has also offered some hawkish comments overnight as he argues BoJ should act to prevent inflation from accelerating.  GBPJPY had hit a high yesterday of 216.80, the pair now sits at 215.50.

Geopolitical issues rear their heads again.  US and Iran have again traded military strikes which unsurprisingly has sent oil price higher yet again, WTI and Crude reaching $92.25 and $97.00 respectively although both are a couple of dollars off those highs as I type.  Germany has accused Russia of being behind the recent attempted drone attack at Leipzig airport which they say is part of ongoing Russia operations in Europe.  There is some thinking these operations are designed to split European support for Ukraine, indeed it is possible the right-wing German opposition party AfD, who want to stop support for Ukraine and reopen ties with Russia, could claim a victory in the Saxony-Anhalt elections this Sunday.

To cap it all off, US and Canadian trade disputes has led to Trump renaming Lake Ontario to Lake America.  Trump is putting pressure on the likes of Apple and Google to change the name for US users on their mapping software although a quick search this morning still shows the name as ‘Lake Ontario’ in the UK.  BoC are liekly to leave their rates unchanged at their meeting this afternoon, I’d imagine the press conference will bring some comments regarding the break down in recent US/Canada trade talks.

We have Burnham in Parliament again today as he faces a potentially tough line of questioning in PMQs.  US ADP employment could well come and go with minimal fuss, while Aussie PMIs and trade balance are the highlight overnight.

Have a great day…

-  13.15 US ADP

-  14.45 BoC rate announcement

-  15.00 US factory orders

-  15.30 BoC press conference

-  19.00 Feds beige book

-  00.00 AUS S&P services PMI

-  02.30 AUS trade balance