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This Weeks Recap.

The Reserve Bank of Australia (RBA) left interest rates and policy settings unchanged after Tuesday’s meeting, which lent some support to the Australian dollar. The RBA continues to forecast a September start to tapering asset purchases (quantitative easing) and this was a surprise to some in the market who had expected the recent Covid lockdowns would see the bank delay tapering. It seems the central bank isn’t too concerned about the economic impact of the current lockdowns, at least at this stage. But with cases still growing sharply the likelihood of the current lockdowns dragging out much longer than expected is rapidly growing.

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Central Bank Action Looms

Key Points:
• Worldwide coronavirus cases surpass 199.022 million with over 4.240 million official deaths.
• Australian Bank Holiday saw a quit start to the week.
• Covid fears send Oil and stocks lower Monday.
• Sydney, Australia has reported another 207 new cases of coronavirus Monday.
• New Zealand’s Medal Tally- 4 Gold, 3 Silver, 4 Bronze making us twelfth on the medal table.
• AUD to come under selling pressures if the RBA delay their taper.
• Japan extended its state of emergency to Osaka recently and 3 areas near Tokyo to avoid a spike in coronavirus cases in efforts to avoid a possible system collapse during the Olympics.

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This Week’s FX Recap

FX Update: 

The Federal Reserve Rate announcement and Monetary Policy Thursday morning was “as predicted” with investors expecting the Fed to hold rates to near zero and continue with their asset buying. Markets were keen to see what road chairman Jerome Powell would head down with inflation and tapering of their bond buying program. Powell stuck with the 120B bond buying but said the economy has made progress recently toward jobs and inflation goals but would continue to assess progress in the upcoming meetings. On one side it looks as if they should start tapering, but on the other hand they have the unemployment picture showing they are not quite ready to pull the trigger – also coupled with coronavirus cases increases concerns. In summary we don’t think the Fed could have been more dovish in their stance on current policy and where things are headed over the rest of 2021. Stock markets held steady post the release but with the Fed potentially ready to fire a warning shot in upcoming meetings we could see equity markets pull back off record highs and put a halt to any upside momentum in the New Zealand Dollar. The Greenback also weakened off across the board following the Fed release with the overall tone being, the Fed will keep a soft policy approach until well into 2022-2023. 

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FX Update: Markets Await Fed Monetary Policy Announcement

Market Overview

• Worldwide coronavirus cases surpass 195.330 million with over 4.182 million official deaths.
• Australian CPI y/y is expected to jump from 1.1% to 3.8% tomorrow.
• Sydney, Australia has reported another 172 new cases of coronavirus in the past 24 hours of which 62 were in the community.
• US indices- DOW, Nasdaq and S&P all close near record highs.
• A leading US indicator of economic health- the New Home Sales indicator published at 676k compared to 800k predicted, the number of new homes built in June. This result is the worst release since figures were published in April 2020.
• Hayden Wilde wins a Bronze in the Men’s Triathlon, this is New Zealand’s first medal at the Tokyo Olympics.

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This Weeks Recap.

FX Update: 

Movements in currency markets this week have been largely dominated by broad swings in risk sentiment. There has been a strong correlation between swings in US equity markets and moments in the NZD and AUD, and we expect that trend to continue in the near term. Weakness in US equities in the first half of the week saw the NZD and AUD trade down to recent cycle lows against the USD, but a recovery in stock markets in the past couple of days has caused both currencies to recover somewhat. The improving risk sentiment has also helped commodities such as crude oil which managed to gain 4% on Wednesday night, climbing back above $70.00 a barrel. 

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Delta Concerns Weigh on Risk

Market Overview

• Worldwide coronavirus cases surpass 191.670 million with over 4.112 million official
deaths
• Markets are now pricing in a 90% chance of a RBNZ rate hike in August this year, this was May 2022 until recently
• 55 cases linked to athletes in the Olympic village have tested positive for coronavirus since 1 July
• Canada will reopen its borders with the US on August 9th.
• Japanese Inflation jumped to 0.2% from -0.1% expected to June 2021 y/y
• Australian lockdowns in Sydney and the state of Victoria are predicted to cost the economy 10B and shrink the countries GDP by as much as 1.5% in the third quarter figures
• Crude Oil settles at 66.80 per barrel down -7.5% on the day after demand drops

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Economic Releases

Tuesday 20/07
1:30PM, AUD, Monetary Policy Meeting Minutes

Thursday 22/07
All Day, JPY, Bank Holiday
11:45PM, EUR, Monetary Policy Statement

Friday 23/07
12:30AM, EUR, ECB Press Conference
All Day, JPY, Bank Holiday
7:30PM, EUR, German Flash Manufacturing PMI
Forecast 64.2
Previous 65.1
7:30PM, EUR, German Flash Services PMI
Forecast 59.4
Previous 57.5

FX Update

Jerome Powell, the Federal Reserve Chairman, addressed congress midweek holding back expectations against tightening policy by saying “while reaching the standard of substantial progress is still a way off, participants expect that progress will continue”. As labour supply increases as they roll off unemployment benefits – “it’s likely that we will still be short of maximum employment,” – “this is why we don’t see that it’s time to raise interest rates now”. He went on to say the Federal Reserve won’t hesitate to raise interest rates to keep inflation under wraps but he repeatedly said he expects pressure on price rises to ease towards the end of the year. He is not in a hurry it seems to start paring back their 120B monthly treasury securities purchases.   

The US CPI figure has jumped 0.9% m/m to June after recording 0.6% in May and 0.8% in April. Annually this number has accelerated to 5.4% in June 2021 from 5.0% in May, a fresh high since August 2008. The number beat expectations at 4.9% y/y with the biggest rises in gas, used cars and trucks as well as utility services making the largest impact. This raises the question – is the Fed still operating in a “transitory” moment in time or is this something a little more enduring? We view the chances that Powell could be wrong in his inflation forecasts very high. 

China’s economy grew by 7.9% y/y to end the second quarter of 2021 close to the predicted 8.0% figure we were expecting but well down on the 18.3% recorded in the first quarter. However, in line with previous quarters recorded going back to late 2020 this falls in line with an improving economy rebounding well from the coronavirus outbreak.   

Key Points:

  • Worldwide coronavirus cases surpass 189.696 million with over 4.082 million official deaths.
  • Markets are now pricing in a 90% chance of a RBNZ rate hike in August this year, this was May 2022 until recently.
  • Tokyo has reported over 1,300 new coronavirus cases in the past day putting emergency services on edge with 3nthe number of hospital cases surging.
  • NZ inflation prints at 1.3% q/q and 3.3% y/y.