The New Zealand Dollar fell overnight in response to comments made by RBNZ governor Wheeler who said that “A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.” The RBNZ governor also said that the RBNZ is concerned about keeping inflation on course to hit the top end of the bank’s 1% – 3% range as annual inflation is currently just 1.7%.
RBNZ Still Fighting NZD Demand
Strong demand for NZD, typically linked to its yield appeal, has been weighing on inflation and continues to pose a challenge for the RBNZ who worry that sharp rises in the currency will hurt exporters and weigh on import-driven inflation. Wheeler said that “The appreciation in the exchange rate has been a headwind for the tradables sector and, by reducing already weak tradables inflation, made it more difficult to reach the Bank’s inflation goals.”
There have been some positives though with shipments increasing over recent months, linked to a rise in dairy prices which has boosted the earnings of New Zealand’s top export item.
Wheeler Highlights Risks of Removing LVRs
Alongside these comments, Wheeler also said that the housing market was at risk of surging again if the RBNZ removed its loan-to-value lending restrictions. These comments come against the current backdrop of increased political pressure on the bank to rethink the use of the LVR restrictions.
The country’s Prime Minister Bill English noted during comments made earlier this month that the restrictions were temporary and that the RBNZ should provide their conditions for removing them. Sales in the New Zealand housing market, which had been soaring previously, have now cooled over recent months with sales down nearly a quarter over the twelve months to July.
After rallying up to trade fresh 2017 highs, breaking above the 2016 high of .7848, NZDUSD has now fallen back and is currently retesting the broken bearish channel resistance line. If price breaks back inside the channel, the next key support will be a test of the rising trend line from 2015 lows. To the topside, above the .7848 level, the next key resistance will be the .7750s mid-2015 high.
US Consumer Confidence Rises in August
US Consumer Confidence rose once again over August, printing 122.9 vs. 120.7 expected. Despite what has been a turbulent summer for American politics, with markets clearly losing confidence in the likelihood of Trump delivering economic stimulus, consumer confidence has now risen to near the post-GFC high.
However, there are headwinds as the debt ceiling debate comes into focus and the risk of a government shutdown increases. If a deal can’t be agreed and government employees are temporarily suspended, this is likely to dent confidence once again. For now, though, it seems that with wage growth on the rise and the labour market at full capacity, consumers are remaining confident.
This supports the case for a strong GDP reading in the third quarter which could see growth in the 3% area, linked to a large contribution from inventories. So far it seems that Hurricane Harvey is likely to have only a modest subduing impact on growth figures. Strong consumer confidence and better growth will clearly be good news for the Fed, but it does not seem yet that they will be enough to strengthen the case for a December hike as inflation remains the key determinant there.
The US Dollar Index is currently challenging the 2016 low where some profit taking on shorts has kicked in. For now, though, unless we see a stronger bid here, the focus remains on further downside with the supporting trendline of the broader “megaphone-top” pattern, the key objective.