NZD defies rate cut, Aussie jobs data in doubt

Who would have thought the best way to get the Kiwi to rally was for a rate cut? That’s precisely what happen earlier this morning after the Reserve Bank of New Zealand cut rates by another 25bp. Of course it’s not just about the decision itself, it’s also the perception of the RBNZ’s willingness to cut rates further and how the market perception changed from before the decision. The ensuing reaction would suggest markets had overpriced the RBNZ’s desire to keep on cutting.

The Kiwi rallied 100 pips in the ensuing period.

Kiwi rallies on RBNZ

Certainly, if we are looking at the post decision statement, while Reserve Bank Governor Graeme Wheeler said rates will be cut further if “circumstances warrant” but leaves the impression that current rates should do the trick.

Here’s an extract from the statement:

“Monetary policy needs to be accommodative to help ensure that future average inflation settles near the middle of the target range. We expect to achieve this at current interest rate settings, although the Bank will reduce rates if circumstances warrant. We will continue to watch closely the emerging flow of economic data.”

If you take the same view as the economists from Westpac, you may be tempted to hold a long-term short position, with their expectations that key economic indicators will warrant another 50bp to be cut in 2016.

The statement made by the bank is by no means impressed with currency strength, noting “the rise in the exchange rate is unhelpful and further depreciation would be appropriate in order to support sustainable growth.”

The full statement available at rbnz.govt.nz.

Locally, unemployment data released this morning shocked the local unit around 100 pips higher. The official unemployment rate fell from 5.9 to 5.8% as 71,400 new jobs were created in November. Full times jobs rose 41,000 according to the ABS.

It’s all about market expectations and the result was far better than the -10K and 6% unemployment rate expected. What makes this particularly appealing to market participants is it’s the second solid monthly jobs data in a month. So we could probably expect some upward revision to GDP, and a shift in expectations surrounding the RBA’s next move on rates. We’re already hearing some views that the RBA may indeed raise rates next year.

Still, there is much talk about the accuracy of the employment stats which is perhaps why we saw the Aussie tail off back below the 72-figure. In a note, Deutsche Bank said the probable increase would be around 5-20K new jobs due to sample rotation skewing the result. In simple terms, the ABS use sample groups to derive its figures, and the Deutsche bank believes “the group that rotated into the survey in November had a much greater tendency to be employed than the group that rotated out.”

Whatever the case, if we take the jobs data at face value, would not the RBA be nervous about the currency value reflecting this burst of energy from the economy? Yes, and ironically it’s the same factor that could promote economic weakness. It would seem reasonable to me to expect Stevens and Co at the RBA to begin a new round of jawboning in 2016, after they have "chilled" for the Christmas break.

Aussie bounces on jobs data