The Kiwi Dollar Spikes on Inflation, as Risk Appetite Trickles Back Early On

Risk appetite trickles back into the markets early on supporting the commodity currencies, while the Kiwi gets a boost from Q3 inflation numbers.
Bob Mason
USD/JPY daily chart, October 10, 2018

Earlier in the Day:

Economic data released through the Asian session this morning included 3rd quarter inflation figures out of New Zealand and September inflation numbers out of China, with the RBA releasing its monetary policy meeting minutes from the 2nd October meeting.

For the Kiwi Dollar, 3rd quarter inflation came in better than expected, with the annual rate of inflation hitting 1.9%, up from a 2nd quarter 1.5% and ahead of a forecasted 1.7%, according to figures released by NZ Stats.

  • Petrol prices surged by 19% year-on-year, driving the annual rate of inflation, the increase in petrol prices attributed to rising crude oil prices, a weaker Kiwi Dollar and a regional fuel tax that was introduced in Auckland in July.
  • It was the first time that petrol prices rose for 4 consecutive months since September 2008, with more rises likely to come, a nationwide increase in petrol tax having been introduced in September.
  • Quarter-on-quarter, consumer prices rose by 0.9%, coming in ahead of a forecasted 0.7% and 2nd quarter 0.5%, with petrol prices rising by 5.5% in the quarter.

The Kiwi Dollar moved from $0.65432 to $0.65931 upon release of the figures before easing back to $0.6572 at the time of writing, the Kiwi up 0.32% for the session.

For the Aussie Dollar, the RBA minutes provided few surprises, salient points from the minutes including:

  • Developments in trade policies continued to pose significant risks to a positive outlook on growth over the following couple of years.
  • S tariffs on China had affected capital goods and industrial inputs proportionally more than consumer goods.
  • Growth in industrial production in Asia had eased, as had growth in exports and new export orders; exports from the euro area to China had also eased.
  • In China, economic data out of China was mixed, with economic activity subdued in some sectors, infrastructure investment in particular, while manufacturing and real estate investment had risen.
  • Prices of iron ore and coking coal had increased over the month, attributed to strong demand from Chinese steel producers and supply disruption for coking coal.
  • Domestically, the economy saw its strongest year-ended growth since 2012, with more recent data supporting solid growth, while growth is expected to moderate from the 1st half of the year.
  • Household consumption picked up, while uncertainties remained as wage growth remained subdued and house prices begun to fall, contributing to below-average growth in nominal retail spending.
  • Housing market conditions continued to ease.
  • Public sector spending continued to growth at a strong pace, with both public consumption and investment contributing to strong 2nd quarter GDP numbers.
  • Mining investment had risen strongly in the 2nd quarter, while non-mining investment eased, with overall conditions in the business sector positive.
  • Employment had risen strongly in August, with job vacancies increasing a little in the September quarter, with employment growth expected exceed population growth in the coming months.
  • Wage growth remained week, in spite of tightening labour market conditions.
  • Energy and bulk commodity prices had remained elevated, supporting Australia’s terms of trade.
  • Members concluded that, when considering outlook for labour market conditions and inflation, the next move in the cash rate was more likely be an increase than a decrease, though there was no strong case for a near-term adjustment to policy.

The Aussie Dollar moved from $0.71385 to $0.71346 upon release of the minutes, which preceded inflation figures out of China.

Out of China, the annual rate of inflation picked up from 2.3% to 2.5% in September, year-on-year, which was in line with forecasts. Month-on-month, consumer prices rose by 0.7%, which was in line with August’s rise and forecast. The Producer Price Index rose by 3.6% in September, coming up short of a forecasted 3.7% rise, while wholesale inflation eased from August’s 4.1%.

The Aussie Dollar moved from $0.71374 to $0.71366 upon release of the figures, before easing to $0.71357 at the time of writing, the Aussie Dollar up 0.07% for the session.

Elsewhere, the Japanese Yen was down 0.09% to ¥111.87, with a pickup in risk appetite through the early part of the day easing demand for the Yen.

In the equity markets, there was some early respite, with Nikkei and ASX200 up 0.30% and 0.48% respectively, while the Hang Seng led the way early, with a gain of 0.63% at the time of writing. The CSI300 was up 0.47%, with the upward moves across the majors supported by the U.S Futures that moved into positive territory in the early part of the day.

The Day Ahead:

For the EUR, economic data scheduled for release through the day includes August trade data for the Eurozone and October economic sentiment figures out of Germany and the Eurozone, the economic sentiment figures the key driver, while the markets will likely pay some attention to the trade data following Trump’s comments about the EU in his Sunday 60 Minutes interview.

Outside the numbers, we can expect the markets to continue to respond to Italy’s budget plans, which were approved by the coalition government on Monday following the submission of draft budgets to the European Commission on Monday. The European Commission now has 1-week to raise any concerns or indicate that it is non-compliant, which then gives the European Commission until 29th October to reject the budget. Rejection would then give the Italian government until 19th November to submit a revised budget. It could be a testy 4th quarter for the EUR…

At the time of writing, the EUR up 0.07% to $1.1587.

For the Pound, economic data scheduled for release through the day includes August wage growth figures and unemployment rate along with September claimant count numbers.

While we will expect the Pound to respond to the stats, focus will ultimately be on Brexit, with negotiators needing to come to an agreement in kind by Wednesday to avoid raising the chances of a “no-deal” as time becomes the British government’s enemy.

At the time of writing, the Pound was up 0.05% to $1.3157.

Across the Pond, economic data is on the lighter side, limited to September industrial production figures and August JOLTs job openings. While on the lighter side, both sets of numbers will likely provide direction for the Dollar, a strong JOLTs job openings continuing to support sentiment towards labour market conditions.

With concerns over the global economic outlook rising, industrial production figures will be looked at closely to assess whether there has been any negative impact from the ongoing trade war between the U.S and China.

As always, noise from the Oval Office could overshadow today’s data, with the markets now expecting Trump to inflict more pain on China through tariffs.

At the time of writing, the Dollar Spot Index was down 0.03% to 95.035, with today’s stats and chatter from the Oval office needing consideration through the day.

For the Loonie, economic data through the day is limited to August foreign securities purchases data that will likely have a relatively muted impact on the Loonie, with sentiment towards the global economic outlook and risk appetite through the day to provide direction.

The Loonie was up 0.07% at C$1.2982 against the U.S Dollar at the time of writing.

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