NZD Tumbles after Dovish RBNZ Statement, USD/JPY’s Rally Limited as Bonds Pared Losses

By: Milla Shaw in Forex Consultant on Dec. 6, 2010

New Zealand dollar tumbles sharply after RBNZ left rates unchanged at 3.0% and signaled that rates will rise to “a more limited extent over the next two years than signaled in the September Statement”. RBNZ governor Bollard noted current low interests are “having a less stimulatory effect than in the past”. And growth is moderating with below average corporate investment intentions, weak household spending and chance of further decline in house prices. On the other hand, near term GDP growth is expected to overshoot on exports and earthquake repairs. Inflation would spike higher temporarily as a result of GST hike and spare capacity reduction. However, “there is little evidence of this spike affecting price and wage setting behavior.” Also, the bank noted strong appreciation of NZD since September and warned that sustained strength in the currency “is inhibiting the rebalancing of economic activity towards the tradable sector.”

US treasury yield continued to jump higher today with yield on 10 year notes rose to 3.33%, comparing to last week’s close of 3.017% before Obama’s tax cut extension announcement. That is also the highest level since June. Yield on 30 year bond already jumped to as high as 4.508. Nevertheless, bond pared losses as the result of the $21b sale of 10 year-note today was less worse than markets feared. The auction drew slightly higher than expected yield o 3.34%. Bid-to-cover ratio was at 2.92, worse than 2.80 bid-to-cover ratio of a comparable auction in November, but not disastrous. USD/JPY’s gain was also limited below 84.39 recent high as yield lost strength towards the end of the session. Focus will turn to tomorrow’s $13b auction of 30 year bond.

Sterling was the strongest current today. There was some support from CBI data which showed factory orders jumped to two and a half year high. Total order book balance rose to -3 this month, highest level since June 2008 while exports orders even hit a 15 year high, thanks to depreciation in sterling. Sterling’s strength is impressive in crosses with EUR/GBP now heading back to 0.8333 near term low. GBP/JPY already broke through 132 resistance and is now heading back towards 134.19 recent high.

IMF Managing Director Strauss-Kahn, who failed to get EU support for raising the emergency bailout fund earlier this week, said that “the effects of the global financial turmoil “are far from over.” Strauss-Kahn criticized EU’s case-by-case approach in dealing with member countries’ debt problem and urged EU officials to consider IMF’s proposal of a comprehensive solution. He said that while “the Greek and Irish experiences revealed the need for crisis resolution tools…… little has be done”.

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