New Zealand Dollar Tumbles after Dovish RBNZ Hike, Risk Appetite Receded Mildly on Poor Data

RBNZ raised the Official Cash Rate by 25bps to 3.00% today as widely expected. However, New Zealand dollar is sharply lower as RBNZ noted in the statement that the pace of further OCR increase is "likely to be more moderate than was projected in the June Statement". The accompanying statement acknowledged that economic growth has "softened" and future prospects for recovery global recovery "have deteriorated". Domestic demand in New Zealand is "subdued" and recent slowing in net immigration will further "dampen consumer spending". Business investment remains low too. Nevertheless, the bank continues to predict "respectable near term GDP growth" and inflation pressures are expected to pick up.

Elsewhere, risk appetite receded mildly after weaker than expected durable goods report from US and a mildly bearish Beige book failed to provide much support to investors sentiments. DOW closed slightly down by -0.38%, or 39.8 pts at 10497.88. Crude oil is additionally pressured by a bearish inventory report and breached 76 level briefly. Gold, on the other hand, managed to stabilize a bit and hovered around 1160 level in US session. Yen crosses generally showed sign of temporary top and we'd anticipate some consolidations on Thursday but there is no indication of reversal yet. Dollar index continued to stay in tight range around 82 level.

Fed Beige Book economic report showed that while "economic activity has continued to increase, on balance," two of the Fed’s 12 districts reported the economy "held steady" and two districts, Atlanta and Chicago, reported that the pace of expansion slowed. Commercial real estates were generally weak across the districts while residential real estates also weakened following the expiration of homebuyer tax credit. Labor market improved only modestly and business were still heavily relying on temporary workers. Also released today, headline durable orders dropped sharply by -1.0% in June, the biggest fall since August 2009 and much worse than expectation of 0.8% rise. Ex-transport orders also dropped by -0.6%.

BoE governor King told Parliament's Treasury Committee that a sustained recovery is not guaranteed yet in spite of the strong upside surprise of Q2 GDP reported last week. King believes that there is still the need for stimulus and the debate should be on the "appropriate degree" of stimulus, not about "applying brakes". King stressed that there is challenge of "rebalancing" the economy away from consumption towards net exports and raising the national saving rate. That would "on inflation potentially to a rate that is significantly below the 2 percent target."

Australian dollar, on the other hand, is the worst performer today. Australian CPI rose 0.6% qoq, 3.1% yoy in Q2, higher than Q1's 0.9% qoq, 2.9% yoy, but missed expectation of 1.0% qoq, 3.4% yoy. Both RBA trimmed Mean CPPI and weighted median CPI missed consensus and came in at 2.7% yoy. The lower than expected CPI reading cooled speculation of another RBA rate hike in near term. Indeed, firstly, RBA is expected to be on hold in August before the election campaign ends on August 21. Secondly, considering the inflation outlook, RBA should at lease be on hold for another quarter and wait for Q3 CPI first. There is also prospect that RBA would be on hold for the rest of the year.

NZD/USD's sharp fall from 0.7394 indicates that a short term top is formed after hitting 100% projection of 0.6559 to 0.7158 from 0.6793 at 0.7392. Outlook is turned neutral for the moment with focus now on 0.7027 support. As long as NZD/USD stays above this 0.7027 support, another rise remains mildly in favor and a break of 0.7394 will target a test on 0.7632 high. However, break of 0.7027 will indicate that whole rebound from 0.6559 is completed and another deep decline would then be seen as medium term correction from 0.7632 extends.