RBNZ Holds Rates

Daily Analysis - 09/11/2017

Central Bank Expects Falling Kiwi Dollar to Boost Inflation


The Reserve Bank of New Zealand held its benchmark interest rate steady at a policy meeting on Thursday, but acknowledged that a sharply lower currency and rising commodity prices had somewhat improved the economic outlook. As was widely anticipated, acting Governor Grant Spencer left the official cash rate unchanged at a record low 1.75%.

Markets Bet on Earlier RBNZ Rate Action

In a bid to dispel global investor uncertainty surrounding the new Labour-led coalition government’s policies, Governor Spencer said fiscal changes proposed by the new government are likely to stimulate economic growth by around half a percentage point in each of the coming three years. He further noted that the injection should help offset weakness in the important construction sector.

When combined with a lower currency, these developments are forecast to lift inflation to the middle of the central bank’s 1.00% to 3.00% target band almost a year earlier than previously expected. The Kiwi Dollar’s recent retreat also prompted the Reserve Bank to move forward its rate hike timetable, with a possible interest rate increase arriving as early as the second quarter of 2019. Investors responded to the latest monetary policy pronouncements by bidding up the NZDUSD pair to as high as 0.6971 in early Thursday trade.


US Crude Oil Production Soars to All-Time High

In a fresh sign of resilience among American shale drillers, crude production in the country surged to a record high last week.  Government data published by the Energy Information Administration indicates that US output reached 9.62 million barrels of oil per day during the week ended November 3rd. That slightly topped a peak struck in June of 2015 just before the crash in oil prices.

The latest figures further confirm the view that US shale drillers are continuing to frustrate efforts by major oil producing countries to curb supply and boost oil prices. US crude futures extended losses on Wednesday following the EIA report, which also showed oil inventories surprisingly rising last week. Stockpiles increased by 2.20 million barrels, jolting the market after the American Petroleum Institute estimated a weekly decline of -1.60 million barrels on Tuesday.  US crude futures for December delivery were last seen trending around $56.90 a barrel.


Chinese Inflation Unexpectedly Picks-Up

A smaller decline in food prices saw China's consumer price inflation hit a nine-month high in October.  Official data unveiled overnight by National Bureau of Statistics showed the Consumer Price Index (CPI) accelerated to 1.90% last month from a year earlier, its highest reading since January. A Reuters survey of economists had forecast the CPI to rise 1.80% on-year in October after notching a 1.60% increase in September. Food prices, which weigh heavily on the basket of goods China uses to compute the CPI, fell -0.40%, improving significantly from September’s decline of -1.40%.

Meanwhile, the Producer Price Index (PPI) climbed 6.90% in October from a year ago to record its fourteenth straight month of expansion. However, growth was somewhat tempered by the PPI’s failure to improve on its September pace. Analysts had projected producer prices to rise 6.60%. AUDJPY, typically volatile and prone to key Chinese economic data, is currently hovering around 87.350.


Condo Demand Boosts Canada Housing Starts

Canadian housing starts rose in October, buoyed by stronger demand for condominiums among first-time home buyers in Toronto and Vancouver.  Data compiled by the Canada Mortgage and Housing Corp revealed that the commencement of new home construction climbed 1.60% to 222,771 units last month on a seasonally adjusted basis.  Apart from topping the 219,293 units that began assembly in September, the latest figure marked the fifth consecutive month of starts above the 200,000 unit threshold.

Market projections were for starts to decline to 211,000 according to economists from the Royal Bank of Canada. A separate housing sector report from Statistics Canada showed the amount of building permits issued advanced by 3.80% in September, the first gain in three months thanks to greater activity in the non-residential space. CADJPY has since reversed from an important resistance zone to last trade around 89.300 in Thursday Asian trade.


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