Currency War Goes On: RBNZ And BOK Cut Rates

 | Jun 11, 2015 04:22AM ET

Market Brief

Asian equity markets were broadly higher after two regional central banks cut interest rates. The Reserve Bank of New Zealand (RBNZ) cut its official cash rate by 25bps to 3.25% in reaction to weak inflation expectations, while the Bank of Korea cut its benchmark rate, the 7-day repo rate, by 25bps to 1.50% in an attempt to revive weak exports. RBNZ’s Governor Wheeler added that the rate cut was justified to adjust the exchange rate to the downside. The RBNZ remains in easing mode and is ready to debase further the NZD to ensure that inflation converges toward the 2% target rate before 2017. The Governor made clear that further rate cuts will be data dependent. The NZD fell sharply against the dollar, down almost 2 figures to $0.7015, slightly above the 0.70 support level. If broken, the next target is $0.6950. However, our favourite currency pair to play the NZD weakness remains AUD/NZD. The Aussie jumped 3 figures to 1.1050 from 1.0750 after the decision, next target being the highs from the last months of 2014, around 1.13.

In Australia, unemployment rate fell in May to 6% from 6.1% in April (revised downward) versus 6.2% consensus. In our opinion, the big picture is not that bright, as the apparent improvement in the job market is mainly due to the unexpected increase in part time employment. The Australian economy created only 14.7k full time job positions compared to 27.3k part time jobs. AUD/USD jumped half a figure to the upside and is currently trading around 0.7760. The next resistance stands around 0.78/0.7820 (Fib 38.2% on May-June debasement and psychological threshold), while the closest support remains at 0.76 (previous low). On the equity front, Australian shares were buoyant, up 1.42% while in New Zealand, equities added 0.94% on the session.