Yesterday Fed’s Yellen started talking about the possibility of a rate rise in 2015 after having studiously avoided the topic for a while, and mentioning it again was seen as a hawkish retrenchment. The dollar strengthened as a result.
Conversely, the RBA looks more likely to continue cutting rates, particularly now Chinese stock-markets and commodity prices are collapsing.
Analysts at Goldman Sachs are forecasting a 0.25% cut to 1.75% in August. Much may well depend on what Balance of Trade figures released on August 5 look like, and whether the current level of easing has contributed to pushing up Q2 CPI set to be released on July 22.
The pound gained a massive boost from Governor Carney’s recent surprise comments that the time when it would be right to increase interest rates was getting closer. He had not really said the time was approaching for a rate hike before, and the comments were taken as a major shift to a more hawkish stance.
With the ECB’s stimulus programme still in play, and no expectations of it being curtailed or “tapered” – in central banker parlance, the advantage lies with the dollar. The tail risks of a Greek implosion would likely effect all central banks in a doveish way, although it would weigh more on the Euro currency obviously.
At its last policy-meeting the RBNZ took the slightly surprising step of cutting rates by 0.25% to 3.25%. However, many analysts see this as just the ‘tip of the iceberg’ with many more rate cuts this year still to come. Bank of New Zealand , for example, expects a rate of 2.5% in October – which is 0.75% lower than the current level.
It’s no wonder the pair is heading south so quickly with such diverging monetary policy outlooks as RBNZ and the Fed, which if anything has become more hawkish. RBNZ gave crashing commodity prices and their negative impact on inflation as the main driver, but there appears to be no let up on that front. The macro-prudential rules brought in to curb house prices will start on October 1 and should help cool the property market.