New Zealand Leaves Rates Untouched

Daily Analysis - 09/02/2017

Reserve Bank Opts to Leave Monetary Policy Unchanged

A more upbeat outlook emphasized by New Zealand’s Central Bank was rapidly overshadowed overnight by concerns about the local currency’s strength which has been a major factor preventing inflation from accelerating to the upside while weighing on growth.

RBNZ Holds Firm

In a widely anticipated move, the Reserve Bank of New Zealand decided to leave interest rates at a record low of 1.75% during its latest decision. However, the one major development that materialized was a sense that the New Zealand dollar was overvalued relative to other global peers. According to the statement from RBNZ Governor Graeme Wheeler, “the exchange rate remains higher than is sustainable for balanced growth.”

Furthermore, he cited the strength of the currency as one of the predominant factors behind disinflation. Any weakening in the New Zealand dollar would help raise import prices, acting as a net positive for inflation. Nevertheless, the outlook remains largely positive despite remarks that “monetary policy will remain accommodative for a considerable period.” The NZDUSD pair fell after the decision, dipping below 0.7200 as downside momentum accelerates.

Oil Prices Rise After Production Hits New Cycle High

While it marked the second largest stockpile in history, the reaction to the weekly storage figures released by the Energy Information Administration was noticeably positive, with WTI futures retaking the $52.00 level and continuing to rise back towards $53.00 per barrel. Data showed that US onshore crude oil inventories rose by 13.830 million barrels through Friday February 3^rd. This brings stockpiles closer to the record levels reached in 2016 despite the significant efforts of OPEC to reduce the ongoing global oil glut.

More importantly, US production showed considerable gains, climbing to cycle highs of 8.978 million barrels per day. However, the drawdown in gasoline inventories appears to have been the spark that sent oil prices soaring. Mirroring the gains in WTI futures, Brent crude oil also reversed from earlier losses during the session, closing back above $55.00 per barrel on Wednesday and extending gains in early Thursday trade.

Germany Denies Greece Debt Relief

With Greece and its bailout partners sitting back at the negotiating table once more as Greece fails to meet conditions set forth for another tranche of aid money, the rhetoric is once again ramping higher. In keeping with an earlier strategy, Germany has once again denied Greece the option for debt relief in the form of a haircut on outstanding debt.

Despite repeated calls from the International Monetary Fund to make Greek debt more sustainable in an effort to ensure that bailouts can actually be repaid, Germany still refuses to even consider the option. German Finance Minister Wolfgang Schaeuble remarked that the only way a haircut was possible was if Greece opted to leave the Euro Area in accordance with the rules set forth by the Lisbon Treaty. With political uncertainty still rising, the Euro is reflecting the growing risks, remaining below 1.0700 and extending losses from earlier in the week.

Norwegian GDP Rebounds Alongside Oil Prices

Giving credence to the idea that rising oil prices are benefiting producers, Norway’s latest growth figures confirmed that a rebound in economic activity is materializing. Gross domestic product grew by 1.10% during the fourth quarter, matching the fastest pace of expansion since the first quarter compared to the third quarter’s disappointing -0.50% contraction. On an annualized basis, GDP expanded by 1.80% through the end of the fourth quarter versus a year prior.

Thanks to expansive fiscal stimulus combined with the rebound in energy prices, the Norwegian economy has been able to reap the benefits of improving global fundamentals despite the significant risks and uncertainty that lies ahead. In spite of the positive GDP reading, the Norwegian Krona has retreated since the announcement, with USDNOK extending gains from earlier in the week as the US currency gradually bounces back.