Pound rises ahead of QIR NZD battered on rate calls

The British pound is the biggest winner in Monday trade, clawing further gains following the Tories’ s overwhelming Election victory, while the US dollar lost most of its post-China rate cut gains. Greece made its € 757 million repayment to the IMF and moves to negotiate the remainder of its reforms list in order to obtain €7.2 bn in fresh liquidity. The NZD was the biggest loser as summer rate cuts by the RBNZ becomes a credible scenario.

Wednesday’s twin release of UK jobs and the Bank of England Quarterly Inflation Report may resurrect expectations of an earlier than expected rate hike. The QIR is expected to upgrade inflation into the 2-year horizon, especially after the minutes of the April MPC meeting revealed the decision narrowly escaped a tightening vote by two hawkish members. Considering the 45% rise in oil, we expect the BoE to have more reasons for a medium-term CPI upgrade.

The UK jobs report –also due on Wednesday—could trigger further GBP gains if the figures come in within expectations – April jobless claims exp -20K, average earnings ex-bonus exp 2.1% from 1.8%, unemployment rate exp 5.5%from 5.6%).

Following last week’s sweeping victory by the Conservatives and ahead of this week’s UK events, GBP has clawed the most gains versus NZD and AUD, while nearing the 200-DMA against USD for the first time since August. GBP post-election reaction was of no surprise to those who read our pre-Election scenario analysis.

Kiwi battered on interest rate calls

The Kiwi was battered across the board after ANZ bank changed its call towards expecting RBNZ rate cuts in June and July. RBNZ Governor Wheeler said last he was prepared to cut interest rates if headline inflation, currently at 0.1% — began to weigh on wages. After last week’s dovish shift from the Reserve Bann of New Zealand, NZ Q1 employment rose 0.7% from 1.2% in Q4, undershooting expectations for a 0.8 rise. The unemployment rate remained unchanged at 5.8%. Other factors augmenting chances of an RBNZ cut this year are weakness in labour markets, slowing dairy prices and increased expectations of macro-prudential policies aimed cooling the housing market.