Currency Market Analysis

Global Themes

NZD

Kiwi flounders despite strong dairy auction

Dairy prices surge at latest auction but supply constraints evident.

Dairy prices saw a significant 4.9% increase at last night's Global Dairy Trade auction, but the New Zealand Dollar failed to see any benefit. The key whole milk powder price was up 5.1%, but the increase appears to be more a result of lower collection rates at the farm gate, due to unseasonally dry conditions in New Zealand last month. Earlier this week Fonterra had already announced that milk collections were down 6% this summer alone due to the weather.

Despite the headline figures the release was overall mildly Kiwi negative with most cross rates down around a quarter of a percent from yesterday's open.

UK inflation dips back to 3%

Pricing pressures start to ease, may take heat off rate hike timetable.

UK inflation showed the first signs of reversal from recent highs last night as the print for Q4 2017 showed a drop back from 3.1% to 3%. The Bank of England has previously stated that it felt that inflation would peak by the end of 2017, and now that the dramatic drop in the Pound post-Brexit has been largely erased, imported inflation by virtue of a lower currency should be diminishing.

Ironically this may reduce pressures on the Bank of England to hike rates quickly, which may see further short term falls in the Pound. Participatory hedging products for GBP importers could be a good strategy, particularly given recent comments from Brexit leader Nigel Farage that he would not oppose a second EU referendum.

Bank of Canada likely to hike rates tonight

Major banks have already reacted ahead of the meeting.

The Bank of Canada is widely expected to be the next major central bank to move on interest rates tonight, raising its benchmark rate from 1% to 1.25%. Overnight swap markets are pricing in a 88% chance of a 25 basis points hike, while the six major banks have already moved on mortgage rates. Logic suggests NZD/CAD may fall below 0.90 on a hike, but if forward guidance suggests no more rate increases for a while, CAD importers could get a shot at protecting the key 0.90 level tomorrow.