NZ Dollar, Yen Soar as RBNZ and BOJ Talk Down Stimulus Bets

Talking Points:

• Yen gains as BOJ’s Kuroda holds back from signaling stimulus expansion
• NZ Dollar higher after RBNZ’s Spencer talks down rate hike speculation
• Australian Dollar spikes downward after S&P downgrades credit outlook

The Japanese Yen traded higher overnight after BOJ Governor Haruhiko Kuroda offered no tangible clues about near-term monetary stimulus expansion at a meeting of the central bank’s branch managers. Kuroda stuck to a familiar script, saying Japan’s moderate recovery continues and the financial system remains stable. He added that easing will continue until inflation is stable at 2 percent and promised further accommodation will be provided if that is deemed necessary.

Markets have speculated that the BOJ may redouble its efforts after the Yen surged to the highest level in nearly four years against its major counterparts on the back of risk aversion following the “Brexit” referendum, complicating officials’ attempts to stoke inflation.

The New Zealand Dollar likewise advanced after RBNZ Deputy Governor Grant Spencer said that further interest rate cuts “could pose financial stability risk”. He added that the central bank is concerned about imbalances in the housing market and offered that new limits on property investment may be unveiled by year-end. Spencer flagged policies based on debt-to-income ratios and a single national LVR limit as possibilities.

The Australian Dollar spiked downward after Standard & Poor’s downgraded its outlook for Australia’s credit rating from “stable” to “negative”. The move followed the weekend’s federal election, where preliminary results hint at the possibility that Prime Minister Malcolm Turnbull will have to form a minority government.

The ratings giant said that “without the implementation of more forceful fiscal policy decisions,” which will presumably prove difficult to push through parliament if Turnbull can’t muster a majority, “material government budget deficits will persist for several years with little improvement.” The S&P reckoned that there is a “one-in-three chance” of stripping Australia of its AAA rating within the next two years. Such a result may push up overall borrowing costs and weigh on economic growth.

Looking ahead, a quiet economic calendar in European and US trading hours may make for a consolidative tone as markets await Friday’s release of June’s much-anticipated US jobs report. The path of least resistance may favor a risk-off tone as positioning shifts toward a more neutral setting after yesterday’s sentiment rebound. S&P 500 index futures are trading flat in late Asian trade however, hinting at muted conviction.

Significant follow-through seems unlikely, with market participants probably leery of pre-committing to a strong directional bias at this point. However, a jittery disposition in the aftermath of recent volatility makes for particularly acute sensitivity to headline risk and an elevated threat of kneejerk price swings.

Where are the major currencies going in 3Q? See our forecasts here!

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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