NZD: Kiwi Rebounds, Q1 GDP on Tap Today

AUD/USD spent much of Monday's post-Asia trade recouping losses - we got as high as 0.6980 and open this morning at 0.6970. Broadly softer USD momentum, a moderation in risk aversion and higher commodities all aided the A$ recovery.

• Drivers for the AUD were mixed, with US equities struggling towards the end of the session, particularly tech stocks. The VIX still fell though, down to 27.50%, its lowest close since the start of May.
• US yields fell, aiding the AUD via yield differentials, as the US Empire manufacturing index came in much weaker than expected (-11.6, versus 15.0). Still, as we highlighted yesterday, short-term correlations with yield differentials remain fairly low at present.
• Commodities were firmer, although energy (Brent crude to +$114/bbl) and agricultural were the main sources of strength. Base metals were still up modestly, while iron ore pushed back towards the $130/tonne mark, despite yesterday's weak China data.
• Today the focus will be on the RBA's May meeting minutes, although how much new information is gleaned on the rate outlook remains to be seen. RBA thinking on wages will be in focus. Also out is the ANZ weekly consumer sentiment print.
• Technical studies remain bearish, with AUD/USD gains deemed to be corrective. Resistance at 0.7054 still eyed, while support comes in at 0.6829.

Early on Tuesday Westpac noted that “many central banks have now realised that inflation pressures are not as transitory as they hoped, and that they will now need to move aggressively to catch up. The RBNZ at least has the advantage of having started the process earlier than many of its peers. But that’s only a marker of relative performance; the RBNZ will ultimately be judged on its response to New Zealand’s specific conditions.”

• “And despite a strong start, it seems that the RBNZ has erred in not following its own reasoning. In a speech last September, the RBNZ laid out a framework for when it would move the OCR in steady, gradual increments, and when it would step up the pace. The conditions for faster action were: that monetary settings were a long way from where they needed to be, that the risks to the economy were becoming skewed one way, and that there was a meaningful risk of not meeting its inflation and employment mandate over the medium term. All of those conditions had arguably been met by the time that speech was delivered. Yet the RBNZ then proceeded with cautious 25 basis point OCR hikes at the next three reviews, only stepping up the pace with a 50 basis point hike in April.”
• “Consequently, we think that the RBNZ’s focus over the coming months will be on making up lost ground. We expect further 50bp hikes at the upcoming reviews in May, July and August. We acknowledge that four in a row would be virtually unprecedented in the era of inflation targeting - but then, so is much of what central banks are facing today.”
• “We’ve also lifted our forecast of the peak OCR for this cycle from 3.0% to 3.5%. We expect that to be reached by the end of this year, with two more 25bp hikes at the October and November reviews.”
• “Our forecast is similar to the 3.4% peak in the RBNZ’s most recent published projections, but it’s still some way below financial market pricing, which has implied a peak of well over 4% at times. Obviously we think that market pricing is overdone - the high degree of leverage in the housing market means that a little will go a long way when it comes to raising interest rates. Even so, our forecasts agree that more will be needed than we thought a few months ago.”

• RES 4: 1.3177 2.0% 10-dma envelope
• RES 3: 1.3173 High Nov 13 2020
• RES 2: 1.3091 High Nov 24 2020
• RES 1: 1.2982/3077 Intraday high / High May 12
• PRICE: 1.2839 @ 20:30 BST May 16
• SUP 1: 1.2820 38.2% retracement of the Apr 5 - May 12 rally
• SUP 2: 1.2745/14 50-day EMA / Low May 5 and a key support
• SUP 3: 1.2568 Low Apr 22
• SUP 4: 1.2459 Low Apr 21

USDCAD remains below last week’s high of 1.3077 and started the week on a bearish note. A pullback is considered corrective though and the outlook is bullish. Recent gains resulted in a breach of 1.2914, May 2 high, and 1.2964, the Dec 20 2021 high. The break of the latter marks an important M/T bullish development and reinforces the positive outlook. This has opened 1.3177 next, the upper band of a MA envelope. Key support is at 1.2714, Apr 29 low.