The US reported softer economic data overnight, which saw the US dollar give back some of its recent gains. Inflation in the US dropped further, with the Consumer Price Index declining by 0.4% in April. Americans filing for unemployment relief for the first time, jumped by 32,000 last week to 360,000. It was last week’s fall that had given the US dollar a real boost and again it was this data that knocked the US dollar down. Housing starts also dropped sharply, although this was offset by a strong rise in building consents. Overall, the US housing recovery looks to be progressing well with super low interest rates driving demand from both investors and homeowners. US manufacturing looks to be cooling a touch so will need to be monitored. The US is still on track for 2% – 2.5% growth this year.

The Kiwi has had a wild ride overnight, trading as high as .8265 vs. the USD before dropping over a cent to .8140 before recovering some ground to start the in the low .81’s. The Kiwi again tested the .8350 level vs. the Aussie dollar, but could not breach this level and starts the day back around the .8300 level.

Yesterday’s budget for New Zealand confirmed that the Government is on track to return to surplus by 2014/15 (two years’ time). The Christchurch rebuild is boosting the Governments revenue as they collect 30 cents in every dollar spent as tax revenue. They forecast growth to rise from 2.5% this year to just over 3% in two years’ time before dropping back down to 2.2% in 2017. Inflation is forecast to rise only modestly, reaching 2.2% by 2017, yet despite this they have the cash rate predicted to rise from 2.5% to 4.5% over the forecast period. This rise in the cash rate looks unrealistic and is reflective of many bank forecasts, so maybe those Wellington economists are all using the same numbers. The Government did sign a memorandum of understanding with the Reserve Bank about the introduction of Macro Prudential rules. These rules will enable the Reserve Bank to control bank lending without raising the cash rate.

The Kiwi is offering good value to exporters in the short term and many are taking advantage of these dips to convert some of their receipts. The big unknown is, will the Aussie dollar hang in there just under 1 against the USD, or tumble further as the mining boom fades.

The recession in Europe continued through the first quarter, with the Eurozone economy contracting by 0.2% in Q1. Germany, the powerhouse of the region, expanded by just 0.1%. The rate cut by the European Central Bank in the first week of May has come too late to save growth in Q2 and further interest rate cuts will be needed. With inflation falling in most major economies including Europe, lower interest rates and a lower currency are needed to give Europe some chance of growth.

In the currency markets, the stark difference in the fortunes of the US and Europe are seeing money flow out of the Euro and into the USD. The Euro traded to its lowest level in six weeks and further downside looks likely as money flows out of Europe.

Its budget day in New Zealand, with expectations that the Government might increase spending slightly as the Christchurch rebuild and the strong Auckland housing market contribute to a pick-up in economic growth. The Government will stay on track to return their books to surplus by 2014/15 and maintain their plan of lowering Government debt from 30% of GDP in 2017 to 20% by 2020. As the government funding requirement falls, this will leave more money available in the economy for other investments.

The Kiwi has held steady vs. the US dollar around the .8200 level, but pushed back above the .8300 level vs. the AUD. The two budgets this week have contrasted by not only the differing economic prospects of the two economies, but also the influence of the respective Reserve Banks. The NZ Reserve Banks has kept rates low to support the economy, whereas the Australian Reserve Bank has had interest rates much higher to combat the effects of the mining boom.

The Aussie dollar dropped another cent vs. the USD after the Australian budget signalled slowing growth for next year. The lower growth forecast also means that the Government will not return to surplus until 2016, four years later than planned. The high dollar and lower commodity prices have been given as the main reason for the deteriorating financial position of the Government. There is an election scheduled for September, which will add more uncertainty to the Aussie growth outlook as people tend to become more cautious ahead of elections.

Whilst the mining boom has led to huge increases on plant and equipment and the increased volume of production should boost exports for many years, the falling commodity prices will make some of the projects marginal. We wonder if the overly tight monetary policy has kept the currency too high for too long and meant that the benefits of the boom have simply been lost. We see further downside to the AUD as international investors continue to sell out of the currency.

The weaker Aussie has dragged the Kiwi lower still, with the NZDUSD rate now trading in the high .8100 area. The Kiwi has also slipped further against the Euro and Pound creating good hedging opportunities for exporters. New Zealand’s budget is due at 2:00pm on Thursday NZT and we expect a more upbeat growth assessment than Australia’s. Exporters would do well to take some action prior to then.

In the US, news that household debt is shrinking has helped boost the markets as well as predictions from the US Treasury that the Government deficit will shrink by nearly half this year. In fact, the US deficit is dropping so quickly that the much feared debt ceiling may not even be met. The US’s growth formula is a powerful force once it gets rolling. The next big challenge for markets will be if/when the Fed signals that it will end its QE program early. The market has grown used to a steady diet of money printing each month, so how it will cope without will be very interesting.

The Australian dollar fell another 0.5 cent vs. the USD overnight after a sharp drop in business confidence knocked the commodity exporter. The Australian budget due tonight, is expected to highlight the damaging effect the high dollar has had on the Governments tax take, by limiting export returns and therefore shrinking the take from the mining and resources tax.

The world’s biggest currency manager, FX Concepts described the Aussie dollar as ‘ferociously overvalued’. It has also been reported that legendary hedge fund speculator George Soros has been taking big bets on the Aussie dollar. He is rumoured to have had a three billion dollar bet on the RBA rate cut last week, banking a cool $60 million on the RBA’s decision to cut the rate. The AUD is now trading down at .9940 vs. the USD, with the next key levels being .9800 then .9600.

The weaker AUD has also dragged the Kiwi down 0.5 cent as traders in Australia sell NZD to hedge the decline of the Aussie proving beneficial for NZ exporters. On the cross, the kiwi continues to trade around the .8300 level.

The US dollar made further gains across the board after retail sales for April beat market estimates. The modest 0.1% rise was well up on March’s 0.5% contraction and shows that consumers are coping well with the Obama led Governments rise in payroll tax. Higher tax revenues are helping to boost the tax take in the US, so much so, that the US Treasury will start reducing down the size of its debt auctions from July onwards.

Today we get an update on NZ retail sales for Q1 with a small decline in overall volumes expected. Yesterday the Real Estate Institute said house prices dropped back in April dipping 2.4%, which will ease some of the concerns at the RBNZ about the strength of the housing market.

The Aussie dollar fell sharply again on Friday night, this time trading below parity with the US dollar for the first time in nearly a year. Once again, it was the weakness in the yen which sparked the selling in the Australian dollar as it loses its proxy status. The Australian Government releases their annual budget tomorrow and are already blaming the high currency for the fact that they will miss their target of returning to surplus in the next financial year. With commodity prices falling, more rate cuts to come and now the Government calling for a lower dollar, further downside to the Aussie looks likely.

The NZD is being dragged down by the weaker Aussie dollar, as traders use the NZD to hedge their Aussie exposure and there is also the fact that Australia is our biggest trading partner, so in a sense where they go we go. The Kiwi traded down as low as .8260 before recovering to the .8300 area vs. the USD. If the selling in the Aussie continues, then exporters will once again be looking at some late season currency levels that will help boost their NZD receipts. The Kiwi is lower against the Euro and Pound, but holding steady vs. the AUD, just below .8300 and steady vs. the weakening yen around the 84.00 level.

The US dollar is starting to make gains across the board as the US’s pro-growth policies make it an easy pick for international investors. With the yen tumbling, the Euro mired in recession and the Chinese currency fixed, the US dollar really is the logical choice for international investors, particularly as recent strong data adds to the case of an early end to the Fed’s QE program.

This week, we have both the Australian Budget on Tuesday and the NZ Budget on Thursday. The Aussie budget is expected to include more tough Government spending cuts, which will weigh on growth and make the case for more interest rate cuts clearer. In New Zealand, the Government remain on track for a budget surplus by 2015/16 with their accounts helped by asset sales. The Government is also experiencing higher tax revenue as the economy performs better than expected, helped by the Christchurch rebuild.

The Australian dollar has tumbled this morning after the Japanese yen weakened beyond 100 to the US dollar. The yen weakness will force other Asian currencies to drop to remain competitive with Japan and the Aussie dollar has long been held as a proxy for investing in the Asian currencies. So, as those currencies fall, then investors no longer need to hold Australia dollars. The Aussie has dropped 1.5 cents overnight against the USD and this has helped push the NZDAUD crossrate back above .8300.

The sharp fall in the Aussie comes despite strong employment data released yesterday in both Australia and New Zealand. Both countries are reporting very erratic data, with big falls in one period being followed by sharp rebounds in the next. The bottom line is that employment is broadly stable in Australia and improving slightly in NZ, but only due to the Christchurch rebuild.

In the US, those people filing for unemployment relief fell to the lowest level since January 2008 last week. It was this news that sent the yen tumbling past the 100.00 level vs. the USD. On-going gains in employment point to a more robust recovery in the US and we are starting to see the USD make gains on the back of this economic outperformance. Longer term US interest rates have moved back up slightly, further boosting the appeal of the USD.

The Kiwi finds itself back down below the .8400 level vs. the USD on the back of the sharply weaker Aussie dollar, but back above .8300 on the NZDAUD cross. The NZDJPY rate is sharply higher courtesy of the weak yen.

NZ exporters will be looking for further weakness towards the low .8300 US level as a short term hedging opportunity. They will need the Aussie dollar to drop back below 1.00 vs. the USD to see a more meaningful decline in the NZDUSD rate. One experienced investor, Stanley Druckenmiller, who worked for legendary investor George Soros back in the 1990’s, sees a lot more downside to the Aussie dollar as the Australian Reserve Bank keeps cutting rates to help rebalance the economy away from the fading mining boom. Soros, with Drunkenmiller’s help, made US $1 billion in a single day betting on the British pound falling out of the pre-Euro rate mechanism in 1992.

The New Zealand Reserve Bank stole the limelight yesterday, when they let slip in Parliament that they had been intervening in the NZD. It appears the RBNZ have been selling the NZD when it got above .8500 vs. the USD and possibly when it traded above .8300 vs. the AUD after Tuesday’s Aussie rate cut. The selling is designed to limit the gains in the currency, whilst the Reserve Bank acknowledge they do not have enough fire power to turn the market.

The Kiwi tumbled 1% vs. the USD on the news, settling just below .8400 and down below .8250 against the AUD. The biggest drops have occurred against the Pound and the Euro with both crossrates now at their lowest level in several months.

The other major news from the RBNZ, was their plans to make the big four Australian owned banks put up more capital for loans they make that are greater than 80% of a property’s value. Back in March, the Reserve Bank commented that 30% of all new lending fell into this category and were concerned by this. The effects of the new capital rules will see the four banks have to post 12% more capital for housing loans after September 30th. We would expect the mortgage market to become two tiered as a result, with ultra-competitive rates for mortgages that are below 80% and higher pricing for those wanting to borrow more. The Reserve Bank is trying to cool down the housing market and ensure that if house prices fell back for some reason, the banks would remain in a strong financial position and not need emergency funding as they did in the financial crisis of 2008/09. The Reserve Bank also said that if the housing market cooled off and the currency kept rising, they would be in a position to cut interest rates. This would help limit the gains in the currency, but it would be unlikely that the banks would lower mortgage rates. Overall, the Reserve Bank’s actions are a positive for the country. A lower currency will boost export earnings and less demand for housing will mean there is more money available for more productive investments.

Today, the focus will be on employment data from both NZ and Australia. Both sets of data have been somewhat erratic of late, so we will treat the outcomes with a high degree of caution. The market is looking for a small gain in employment for NZ and a small loss of jobs in Australia. The NZ data is due at 10.45am and the Aussie data is out at 1.30pm NZ time.

After a run of soft economic data for Australia, the Reserve Bank (RBA) decided to cut the official cash rate by 0.25% to 2.75%. They indicated that they may consider a further cut as the low inflation rate gave them scope to cut rates. They said they had used ‘some’ of that scope yesterday. They also said that the high AUD was somewhat of a puzzle as commodity prices had fallen and interest rates were lower.

In the markets, there was an initial sell-off of about 0.50 cents and then some more selling in the London market. However, the Aussie recovered some of that lost ground as the market is looking at the rate cut as a positive for the Aussie economy. It also highlights an issue for Australia and New Zealand and that is, with most other major Western economies having cash rates close to zero, even cutting cash rates to something like 2% would still make their currencies relatively attractive.

The NZDAUD crossrate spiked up on the news of the rate cut trading as high as .8350 as NZ now has an interest rate advantage over Australia in the longer term interest rates, as the market is pricing in interest rate rises for NZ from the middle of next year onwards. However, the crossrate has dropped back into the low .8300 area overnight as the Kiwi experienced more selling than the Aussie from offshore traders. The logic here is that lower rates in Australia actually make it less likely that NZ will raise rates and therefore some traders sold out of their NZ dollar bets. On balance then, it looks like another rate cut is in the pipeline from Australia at some point over the next few months. This should keep the upward pressure on the NZDAUD.

In international news, the Euro made a brief recovery on the back of better than expected German manufacturing data. However, ECB head Mario Draghi’s comments last week that they would consider more European interest rate cuts, limited any gains in the Euro.

The Kiwi starts the day down below .8500 vs. the USD, just above .8300 vs. the AUD and down sharply vs. the Yen, Euro and GBP. The market will now move its attention to tomorrow’s employment data for both New Zealand and Australia.

Australian retail sales fell in March and job ads declined adding further weight for an interest rate cut when the Reserve Bank of Australia meet this afternoon. However, the market seems divided on the outcome even with the Federal Treasury department lowering their growth forecasts that underpin next week’s budget announcement. Treasurer Wayne Swann has talked about grave decisions needing to be made, which means spending cuts. This will drag growth down further and leave the RBA as the only source of stimulus for the economy.

The Aussie dollar has remained elevated above the 1.02 level for nearly a year now, even though the price of Australia’s key exports – Coal and Iron Ore have dropped. It looks like the 3% cash rate has been the main reason for the Aussie strength, as it offers the highest yield of any of the world’s major freely traded currencies. The Aussie dollar has also been a proxy for Asia which, whilst slowing of late, still offers much higher growth rates than western economies. From the RBA’s perspective, the high dollar almost guarantees that inflation stays low and therefore makes their job easy.

The NZDAUD crossrate traded to its highest level since 2009 on the back of the weaker Aussie data and forecast estimates have the Aussie cash rate at 2.25% in a year’s time, below the 2.5% steady rate for NZ. If this combination of rates occurred, we would see the NZDAUD rate head on up towards .8500.

In Europe, ECB President Mario Draghi, who finally cut the cash rate last week, is now saying he will make more cuts if required. It seems that a slowdown in Germany has finally pushed the ECB into action despite the woes of southern Europe.

In NZ today, we get an update on wage cost inflation which is expected to stay relatively subdued. On Thursday we have the quarterly update on employment. The RBA decision today is at 4.30pm.

The monthly jobs data from the USA showed a better than expected 165,000 gain in April and revisions to February and March added another 114,000 jobs. All this combined to push the unemployment rate down to 7.5%, the lowest in four years. The US Federal Reserve has tied the ending of their QE program to the unemployment rate getting to below 6.5% so, another move in that direction saw longer term US interest rates rise sharply as it increases the chances of an early Fed exit. US shares though, were boosted by the stronger economic outlook that can be drawn from the increase in jobs.

There has been some concern of late in the US that the new taxes introduced by the Obama administration would hold back the economy, but the strong level of hiring suggest that the economy can cope with the extra tax burden.

The USA has pursued a pro-growth response to the financial crisis and the steady growth in jobs is reward for that approach. Europe on the other hand has followed a path of austerity with governments cutting spending and the ECB has funded the banks but limited its money printing. In Europe the unemployment rate is still rising, with the latest reading at 12.1% Europe wide. The likes of Spain and Greece have unemployment rates above 25% and a return to growth seems many years away.

In the markets the Kiwi is back above the .8500 level vs. the USD and back below .8300 vs. the Aussie dollar after a brief test of that level early on Friday night. The Japanese Yen weakened after the US jobs data as the higher US rates attracted money back from Japan.

The main focus for local markets this week will be the Reserve Bank of Australia’s interest rate review meeting announcement at 4.30pm tomorrow. We think there is enough evidence for a rate cut and market estimates have moved up to a 50% chance from just 30% last Monday. Also out this week is Australian retail sales today, followed by trade balance figures tomorrow and to round out the week unemployment data on Thursday. On the local front we have unemployment numbers on Thursday also.

The European Central Bank cut the official cash rate by -0.25% from 0.75% down to 0.50% overnight. The move which had been widely anticipated was initially seen as a positive for the Euro because it would help growth. However, in the post meeting press conference ECB head Marion Draghi said that they are considering having negative interest rates for excess money held on deposit with them by European Banks. The idea is that this would force banks to lend more money to the struggling Eurozone businesses and public. But it would also be a negative for the Euro as there would be less incentive to hold Euro’s. At present the US Federal Reserve still pays interest on excess reserves the US Banks have put on deposit and so the US dollar would become a lot more attractive to large wholesale amounts of cash deposits. Switzerland has negative interest rates on its Government debt as people are willing to pay the Swiss Government to hold onto their cash.

These discussions by the ECB signal another phase in the fight against the financial crisis and it is hoped that the NZ reserve Bank take notice as the talk of negative interest rates around the world makes their hints at rate hikes completely misplaced. Global interest rates are low and moving lower and NZ will end up following that trend. The RBNZ will need to find other ways of implementing monetary policy.

Across the Tasman the rate cut next week looks increasingly likely as building approvals plunged in April. It seems that the parts of the economy that are sensitive to interest rates are contracting again, a clear sign that rate cuts are needed. The Aussie cash rate is at 3.00% and we can see it dropping to 2.00% overtime. Lower cash rates in Aussie will help drive the NZDAUD cross rate higher. It is already getting close to .8300 and the next key level above there is .8500.

In the US less, people filed for unemployment relief in the last week which the markets took as a positive sign ahead of tonight’s jobs data. Expectations are for an increase in jobs of 145,000, down from last months 188,000 rise. The US Fed have tied their monetary policy program to the unemployment rate so a significant divergence in either direction will have a big impact on the markets.

The Kiwi starts the day back around the .8500 level vs. the USD, just below .8300 vs. the Aussie and back up towards .6500 vs. the weaker Euro.

The kiwi dropped sharply after prices at Fonterra’s latest online auction dropped -7.2% on average. Previously prices had risen sharply as Fonterra rationed supply due to the drought, but with rainfall back to normal we expect dairy prices to drop back to their pre-drought levels. It was interesting to see just how quickly the Kiwi fell after the result, suggesting that much of the recent strength in the Kiwi has been international investors misreading the recent rise in dairy prices.

The Kiwi has dropped back below .8500 US on the news and is also sharply weaker vs. the Euro and Pound. Against the Pound the Kiwi has tumbled well over 1.0% after better than expected data from the UK.

Across the Tasman, the AIG Australian Purchasing Managers Index (see graph below) looks very grim, dropping to its lowest level since March 2009 which was the peak of the financial crisis. Back then the Australian Reserve Bank were slashing interest rates to fight the crisis but now they are dithering about rate cuts beguiled by the fading light of the mining boom. Clearly Australia needs lower interest rates as the PMI data highlights. The recent Chinese data also points to a slowdown in China as well. Everything points to a rate cut, which should come next week, but the RBA have disappointed the market many times before so we will just have to wait and see.

In the US, the Federal Reserve said it was business as usual for them, maintaining their rate of asset purchases at USD 85 Billion a month until there is a significant pick up in the labour market. The ADP employment report, which comes out a few days ahead of the official numbers (due Friday night), came in at +119,000 jobs added, well below the 150,000 estimated and well below the 200,000 new jobs a month that is needed to keep the unemployment rate from falling. In the US, like most western economies, the government is trying to raise taxes to curb the deficit, which in turn acts as a drag on growth and jobs creation. This is one of the reasons why we get super low interest rates, very low inflation and low levels of economic growth. Whilst it is likely that the US and other Central Banks will throw more money at the problem, if the first 10 trillion did not fix the problem it is unlikely the next 10 trillion will either. The Central banks need to realise that the economies need time to naturally repair, their jobs are to support the recovery not to try and create it.

A number below 50 represents contraction, whilst a number above signals expansion. The decline was led by weaker than expected orders down from 45 to 40.6.

The Kiwi retained its firm tone overnight despite soft economic data from NZ yesterday. Building consents plunged -9.1% in March raising questions about the speed of the Christchurch rebuild and raising questions as to why more houses are not being built in Auckland were prices of existing homes are rising rapidly. In fact, consents for houses are running pretty much flat over the last six months with only the odd apartment building boosting the overall consent numbers. Also in NZ, a weaker than expected result in the ANZ Banks monthly business confidence index which dropped back two points. This series has had a counter cyclical nature to it, with firms being overly optimistic in slow times and overly pessimistic in good times. NZ also had monthly credit data for March which showed household debt rose at a +4.3% annual rate still only modest and well below the 10.0% annual rate of deposit growth. In fact in the last two years deposits have grown by NZ$7.0 Billion more than debt. Whilst the gap between the two is still wide, when you factor in Kiwisaver growing at nearly $ 2.0 Billion per annum household finances are repairing at a rapid rate.

Across the Tasman, Australian housing credit grew at just +0.2% in March dropping the annual rate to just 3.0%. This soft credit data and super low inflation should pave the way for an interest rate cut from the Australian Reserve Bank either next week or certainly by June.

In the markets, the Kiwi remains around the mid .8500 area vs. the USD and steady in the mid .8200’s vs. the AUD. The NZDJPY rate is back -0.50 cents to the low 83.00 level as the Yen continues to recover ground vs. a weakening USD.

In the US, the markets are worrying about another midyear slow down and so US longer term interest rates are falling. Historically falling US interest rates has seen money flow back to Japan from the USA. Overnight the Chicago Purchasing Managers slipped below 50 for the first time in three years. A reading below 50 indicates contraction so this has also weighed on the US. (See graph below)

The Euro has been well supported ahead of the widely expected interest rate cut on Thursday night. The markets thinking is that a cut will be good for European growth. However, given the scale of Europe’s challenges we think it will take more than one interest rate cut to revive the European economy.

The world is four years on now from the peak of the financial crisis and after trillions of new money has been printed; inflation is falling and not rising. One of the big risks with all the money printing was that it would lead to hyper-inflation, however for this to happen you need the money to come out of the banking system into the real economies. To date there has only been a very modest pick-up in bank lending in the likes of the USA and even New Zealand. In many countries like Europe and Japan credit growth remains negative.

So the question becomes, will central banks print more and more money to try and generate inflation, or will they realise that the experiment is not working and back off? In the short term, look for more stimulus with the European Central bank almost certain to cut rates on Thursday night after German inflation dropped to just +1.1% in March. The US fed are expected to back off their ending QE line after this weeks meeting instead they will start to suggest that maybe they need to print more money.

One of the key contributors to falling prices has been the recent drop in the price of oil, as the big commodity bets are unwound we are seeing oil drop in price. Many of these commodity bets were designed as a hedge against inflation from all the money printing, but as inflation falls the bets are no longer viable.

In the markets the Kiwi is the stand out performer after the NZ Reserve Bank adopted a tightening bias in their monetary policy review last week. The irony is that NZ inflation is just +0.9% and likely to drop even further. The RBNZ’s problem is that the cheap money from around the world is fuelling bank lending to the housing market. So instead of raising interest rates they need to look at controlling bank lending. If they don’t the NZD will sky rocket and export earnings will tumble. In a world of falling inflation, super low interest rates and a rising tide of printed money, even hinting at rate hikes will see the currency rise and that is exactly what we are seeing in the NZD.

The kiwi starts the day back above .8500 vs. the USD, in the high .8200’s vs. the Aussie and back above 83.00 vs. the Yen. Housing consents and bank lending data are the main data points released in NZ today.

The US economy expanded at an annualised +2.5% pace in Q1 below the +3.0% rate expected. Large falls in defence spending were the main cause for the lower number. Markets reacted negatively to the news with the US dollar losing ground to the Yen but gaining against the likes of the Kiwi .Overall, the US economy looks to be on track for another year of 2.0% growth which is well ahead of anything Europe will see but probably not enough to reduce the unemployment rate below 6.50%. This is the level that the US Federal Reserve has set as the target for the end of their QE money printing programs. We get another update this week for the Fed with their assessment of the current state of the economy being the point of most interest to the markets.

The Yen gained nearly two cents vs. the US Dollar partly on the softer US data but also partly on the Bank of Japan’s inflation forecasts that were released on Friday. They see inflation rising to 0.7% this year, 1.4% next year and 1.9% the year after. They are targeting core inflation which strips out the volatile food and energy component. The latest data shows that prices contracted by -0.50% in March. The markets were disappointed with the Bank of Japan’s forecasts and some traders moved to cash up their bets of a weaker Yen.

The Kiwi has slipped back below .8500 US after the American data and the NZDJPY has dropped nearly 2 cents on the BOJ news. The NZDAUD rate traded close to .8300 on Friday night before dropping back into the mid .8200 area this morning.
The Kiwi did get a boost on Friday after better than expected march trade data was released. The strong NZD718 mil surplus was boosted by a surge in Meat exports as the drought saw more farmers send their stock to the works earlier than usual. The droughts full effect on production will be felt in Q2 data which we will get over the next few months.

In the week ahead the main focus will be the US Federal Reserve meeting on Thursday morning NZ time, ahead of Friday night’s US jobs report which will give us an update on the crucial unemployment number..

The NZ dollar has made strong gains against all its major trading partners over the last 48 hours after the RBNZ monetary policy statement. The Reserve bank upgraded their outlook for the NZ economy and the market has taken this as a sign they are ready to raise interest rates early next year. In a world of super low interest rates and extreme money printing, even the slightest hint of a firmer outlook will see money flood into your currency.

In their March statement, the RBNZ went to great lengths to explain why they had overestimated inflation for the past eighteen months, which essentially came down to the currency being persistently higher than they forecast. Now with the NZD even higher than they planned it is logical that inflation will stay lower for longer. However, they still think inflation will return to 2.0% despite the higher currency.

It seems the RBNZ are reluctant to put controls on bank lending and will resort to the same old interest rate hikes that have driven the currency higher in the past. But in a world awash with freshly printed money, the consequences for the currency will be severe. It is time for the Reserve Bank to realise that the game has changed and a new approach is required.

In the markets, the Kiwi is up to .8500 vs. the USD and trading in the high .8200 vs. the Aussie dollar. In international news the Euro remained weak after Spain’s unemployment rate rose to 27% raising the chances of a rate cut early next month. This level of joblessness is just not sustainable and Spain who will need a bailout in time, so watch for more euro centric volatility on the horizon. In the UK Q1 GDP growth came in at +0.3% .which saw the UK avoid a third straight recession. The UK pound rose sharply on the news.

In the USA, lower than expected jobless claims boosted sentiment towards the economy. The US pre-growth policies stand in stark contrast to the tough austerity measures of Europe. If you were an international investor I think you would much prefer to hold USD’s rather than Euro’s.

The NZ Reserve Bank kept rates unchanged as expected but in their statement they discuss the very low level of inflation as well as the “overvalued exchange rate”. They also commented about rising house prices in some areas and the Christchurch rebuild.

The market has pushed the NZD up 0.50 cents after the statement but we read it the other way, thinking the RBNZ are closer to a cut than a hike given low inflation and the high dollar. We guess the reality will be that these competing forces continue to play out all year and the RBNZ actually stay on hold well into 2014.

There is an interesting story on the wires from Blackrock the world’s biggest money manager, who said they see the Kiwi as being overvalued and hold no positions in the currency. They said that despite the extra yield that NZ offers, the currency is too high by any metrics that they look at. Lately we have seen speculators and investment players cashing up their NZD bets and their selling has been absorbed by steady exporter demand. Yesterday the kiwi traded down into the mid .8300 area vs. the USD after weak economic data from China sparked a selloff.

More weak economic data from Europe also weighed on the markets. However, the extent of the weakness in Europe has increased the likelihood of a rate cut by the European Central Bank who meet on May 2nd. The Euro was sharply weaker after the data and this has seen the NZDEUR jump 1.0%.

So the game remains the same, exporters trying to buy NZD on any dip, local commentators calling for rate hikes to cool the housing market which is mainly fuelled by bank lending and a growing consensus by all that the Kiwi is simply overvalued. Against this backdrop we look for more of the recent choppy trading in the markets to continue.

The Japanese Yen failed to move on through the 100.00 level vs. the USD overnight despite the G20 meeting given the green light to the huge planned money printing from the Bank of Japan.

The Kiwi dollar jumped 0.50 cents yesterday when the Asian markets opened around 1.00pm NZ time, on speculation more Yen would help push the currency higher. However, with the Yen failing to weaken further the Kiwi has dropped back to the .8400 area where it started yesterday. The NZD has made ground vs. the Aussie Dollar which is slowly losing ground on concerns about the outlook for commodities. Australia has their inflation update out tomorrow and like the NZ data last week is expected to show a +0.4% rise in core inflation. This will leave the Australian Reserve Bank well positioned to cut rates when they next meet in early May.

Looking at the commodity markets, it appears that the speculative community have bought large amounts of physical commodities as a hedge against the inflationary threat posed by all the money printing. However with most of the money stuck in the financial system, borrowers are reluctant to take on more debt as inflation is actually falling. As a result, the speculative traders are now holding record stockpiles of commodities. There are 700,000 metric tonnes of Copper in London warehouses owned by traders which is nearly a 100% increase over the last year. These huge stockpiles will eventually be sold and we will see more sharp declines in the price of commodities including Copper, Gold, Silver and even Oil.

NZ migration had its best result in three years with 1,260 permanent and long term arrivals in March. Many of these new migrants will be coming to boost the reconstruction effort in Christchurch so this will help keep wage inflation under control during the rebuild.

Ahead of the RBNZ interest rate update tomorrow the Kiwi looks to be consolidating around the .8400 level, but still looks vulnerable to a further shakeout in commodity prices.

The group of 20 Finance Ministers meeting in Washington DC have agreed to Japans plans to print USD 70.0 Billion a month (Yen equivalent) to buy government debt. The plan which has seen the Yen drop 25% vs. the US$ in the last six months is supposedly designed to boost demand in Japan. But the reality is, Japan has had zero interest rates since 1995 and the economy has remained mired in deflation with no demand for credit. The Bank of Japan are trying to force the currency down, to deliver an inflationary shock to the economy that they hope will break the grip of deflation.

In the markets, the Yen dropped back to the 99.50 level vs. the USD as the markets anticipate more printing from the Japanese. The NZDJPY rate moved up into the mid 83.00 area on the back of the weaker Yen. The Kiwi itself remains stuck in the low .8400 area vs. the USD with concerns about commodity prices weighing on the currency.

In Australia, Treasurer Wayne Swan said the high Aussie dollar was hurting exports and would see the government deficit worsen by AUD 7.5 billion. Australia had hoped to return to surplus by the end of June, instead they look to be on track for another AUD 40 billion deficit. Treasurer Swan is scheduled to deliver the budget on May 14 which was intended to include tough spending cuts. This would hardly be the recipe to get re-elected when the country goes to the polls in September. So look for some slippage on the fiscal side as current PM Julia Gillard tries to win over voters. The Gillard led Labour party are currently 10% behind in the polls.

In the US, we get a first look at Q1 GDP with strong consumer spending expected to have seen the economy run at a +3.1% annualised pace for the quarter. Strong auto sales and a reviving housing market are underpinning US growth.

In New Zealand, we have the RBNZ on Wednesday where all the focus will be on comments about the currency. The high Dollar is keeping inflation low but strong demand in the housing markets of Auckland and Christchurch are limiting the chance of a rate cut. 

The selling of the NZD this week has continued overnight with speculators closing out of buy NZD sell USD trades. The softer inflation data combined with the drought breaking rain have all combined to push the Kiwi lower. Also weighing on the Kiwi has been the dramatic plunge in gold which will have forced many of the big traders to come up with more cash to cover their gold losses. As a result they are forced to close out of their profitable trades of which the Kiwi will have been one. We still expect more selling in gold and silver to spark further risk aversion trades and normally these sell-offs push the kiwi down 5-7 cents from its recent peak of .8679.

In the US softer manufacturing data weighed on the USD and the markets are starting to wonder if the 4 year bull market in equities is coming to an end as the recent reporting season is producing disappointing results.

In the UK, retail sales gave back some of February’s +2.1% gain when they dropped -0.7% in March. However, as this looks like noise in the data, the Pound remained largely unchanged.

The Aussie dollar has managed to hold onto the 1.0300 level vs. the USD despite Goldman Sachs Asset management saying that the AUD is “significantly overvalued”. Yesterday saw Aussie mining and resources shares drop sharply with the big Iron ore producer Fortescue metals dropping 8%. Slowing growth in China and falling commodity prices all spell bad news for the Aussie Dollar and it seems only a matter of time before it drops back below 1.000 vs. the USD. A weaker Aussie dollar will add to downward pressure on the NZDUSD

Focus tonight and over the weekend will be on the G20 finance ministers meeting with the Japanese Yen in the spotlight. We expect some emphasis in the statement on competitive devaluations, but they are likely to hold off calling Japan a currency manipulator at this stage.

The NZD has dropped back more than 0.50 cents vs. the USD overnight after soft inflation data gave the NZ Reserve Bank more time to hold the cash rate at 2.50%. A quarterly rise of just +0.4%, made up mainly of higher Cigarette prices, left the annual rate at +0.9%. This marks a whole year now when the inflation rate has been below 1.0%. The biggest downward influences were falling prices for imported clothing and household goods. These items reflect the on-going strength of the currency and strengthen the case for a rate cut if the currency remains too high. The Reserve Bank meets next week to review interest rates, with an announcement on Wednesday the 24th. Markets will be trying to gauge how strong the governor’s comments on the currency are to see if rate cuts are indeed likely.

The kiwi has dropped back into the low .8400 area vs. the USD after briefly testing .8500 yesterday. The Kiwi is also down sharply vs. the Yen as falling sharemarkets in the USA have sparked the traditional move into the perceived safe haven of the Yen and the USD.

The euro extended losses vs. the US Dollar and the Japanese Yen after the news agency Dow Jones reported Bundesbank President Jens Weidmann said, the European Central Bank may cut interest rates if new information warrants the move. Europe remains mired in a long recession with the tough austerity measures imposed on the southern members dragging overall growth lower. Germany has avoided recession by selling manufacturing equipment to China, but with growth slowing in China a rate cut for Europe now looks more likely. The ECB cash rate is at +0.75%, well above the +0.00- 0.25% range for the US and the 0.00% rate in Japan.

The British Pound fell sharply as well on news that the unemployment rate had risen, sparking fears of another recession. The markets are expecting lower interest rates and more money printing when the former bank of Canada head Mark Carney takes over at the bank of England on July 1st.

The US Fed released their “beige book” survey overnight showing that the economy grew modestly in most districts, but with growth picking up in New York and Dallas. Both regions contain significant manufacturing areas so this bodes well for US growth going forward. Housing was also seen improving across all districts driven by super low mortgage r.

Financial markets stabilized after Monday night’s big plunge and the kiwi regained some ground. However, the bombings in Boston raised concerns about the impact on US growth.

Gold and Silver which had seen the biggest drop held steady just above Monday nights lows as the market tried to digest the huge decline in price. It seems the weight of speculative positions just overwhelmed the market and as people started to sell out of their trades, this in turn triggered more sell orders. For now the market seems to have settled but further selling looks likely with the first major support level coming in at USD 1,200 per ounce. (current price is USD 1,370) on Gold and around USD 18.00 per ounce for Silver (USD 23.00)

In the currencies, the Kiwi regained some ground as Yen sellers emerged around the 96.00 level vs. the USD. The G20 meeting is still to come and again the speculative traders will be conscious that the Yen stalled at 100.00 against the USD and so we may see them trying to close out of their trades in any move by the Yen back towards the 98-99 level versus USD.

One interesting aspect of the Japan story is that the longer term interest rates have actually risen rather than fallen. Normally, when a Central Bank announces that it will buy trillions of Government Bonds, the longer term interest rates decline. In the case of Japan though longer term rates have actually risen. This suggests that the Japanese institutions think that higher inflation will erode the value of their investments and they are selling out ahead of the planned rise in prices. This creates a challenge for the Bank of Japan who are trying to push already low interest rates lower in an effort to kick start the economy.

Today we get the Q1 CPI data for NZ with most looking for a +0.4% quarterly rise and a +0.9% rise for the year. Hardly enough to warrant higher interest rates and this will be the third quarter in a row when inflation has been below the Reserve Bank’s target band of 1.0-3.0%. Lending controls on the Banks and a lower cash rate are needed to help rebalance the NZ economy. The higher currency will skew the risks to the downside and it will be interesting to see how the currency will react to a lower figure. (Data at 10:45)

Financial markets have dropped sharply overnight after Chinese growth in Q1 came in below expectations. Commodities were the hardest hit, with Gold dropping to below US$1,400 per ounce and Silver losing more than 10% last night, following Friday night’s 6% drop. The price of Oil was also sharply lower on the prospect of slower growth in China. The market had been looking for a rebound in growth for China in Q1 from Q4, but the data came in well below expectations with growth of just 1.6% in Q1 well down on the 2.0% quarterly growth of the previous period.

With China slowing and the US economy looking to have had a soft patch in March, markets have moved quickly into risk off mode and the Kiwi, which was the market darling last week is now well and truly out of favour. The NZDUSD rate is back in the low .8400 area and the NZDJPY rate is down below 82.00, a drop of over 4 cents from last Thursday night’s peak.

Adding to the risk off sentiment is growing talk in the US about the Fed ending its QE program by the end of the year. Markets have had a dream run over the last four years on a rising tide of cheap Fed cash. The prospect of that money going away has spooked the markets. The speculators have been massively long Gold and Silver as a hedge against the effects of QE and that is why we are seeing such a dramatic sell-off in those markets. US Fed Chairman Ben Bernanke is stepping down in January as well, which adds to the likelihood the Fed will call time on its extraordinary measures to stimulate the economy.

So the volatility continues, New Zealand exporters will find some mild relief in this sharp sell-off and farmers will find some relief from the rain currently sweeping the country. Tomorrows Fonterra auction should see another sharp rise in prices, but this is driven by the very low volumes of product that Fonterra are making available. As the rain comes and farm production increases, look for those dairy commodity prices to drop back sharply.

In breaking news, 2 have been killed and dozens injured as two explosions detonated near the finish line of the Boston marathon seeing the NZDUSD fall further.

The US has warned Japan not to devalue the yen for competitive purposes ahead of this week’s G20 Finance Ministers meeting in the US. Previously, the G20 have agreed not to pursue devaluation of their respective currencies. Japan’s recent move to double the money supply by printing huge amounts of yen has seen the JPY tumble further and raise questions about their real motive. Whilst they have maintained that the moves are to stimulate the domestic economy, none of the plans are directed at credit creation. The scale of the moves has forced traditionally passive Japanese insurance companies into overseas investments to protect themselves from the plunging value of the yen.

The warning from the US saw the yen gain nearly two cents, moving from close to 100.00 against the USD to 98.00. This drop in the USDJPY rate saw the NZDJPY rate also drop two cents from 86.00 to 84.00. The kiwi also lost a cent vs. the USD to start the day in the mid to high .8500 area. Such is the size of the drop in the yen over the last few months that the associated volatility looks set to dominate the currency markets for a while yet and we expect these big swings to continue.

In the commodity markets, Gold plunged 4% and Oil dropped 2.5% as investors moved money out of these markets into shares and the US dollar. The big speculators had been betting on a further rise in Gold and Oil as the US kept up its printing of money. However, with the Japanese moves boosting the value of the US dollar, they have been forced to sell out of these trades.

In New Zealand this week, inflation is in the spotlight with Q1 CPI data due out Wednesday morning. Expectations are for a 0.4% quarterly rise, but the annual rate is expected to remain close to just 1%. The high value of the NZ dollar will again keep a lid on inflation and more than offset any cost pressures coming from the Christchurch rebuild. The NZ Reserve Bank can comfortably keep the cash rate on hold for the rest of the year.

The Kiwi powered up to its highest level since August 2011 as the exodus from the yen continues and as New Zealand Finance Minister Bill English said that higher house prices could lead to higher interest rates and an even higher currency. One commentator described English as a pacifist in the global currency war. The problem for New Zealand is that the exporters will be the casualties. Once again, New Zealand finds itself riding the currency rollercoaster, with the high dollar reducing export earnings and encouraging imports.

The end game will be a blow-out in the current account deficit which in time, will lead to a credit downgrade and ultimately a shake-out in the currency. These are all in the future and for now, the Kiwi is rising rapidly as money exit’s Japan as fast as it possibly can so to avoid the tsunami of yen coming. The JPY has moved close to the 100 level vs. the USD overnight.

The Kiwi traded up to the mid .8600 level against the USD and tested the 86.00 level vs. the JPY. The kiwi also tested .8200 against the Aussie after weak employment data knocked the Aussie. The unemployment rate rose to 5.6% for Australia in March even as the participation rate continues to fall. It looks as if Australia is experiencing the same effect as the US with the baby boomers retiring and dropping out of the workforce. If it was not for this occurring, then the unemployment rate would be 6% and interest rate cuts would be a certainty.

Looking at the markets, for the NZDUSD, there will be many touting the old high of .8840 set on the 1st August 2011, however this was a one day wonder with most of the selling occurring just above the .8700 area. After touching that peak, the NZD traded at .7970 just six days later. It looks like volatility has shot up in the markets, which will create opportunities for both importers and eventually exporters.

As the Japanese Yen continues to drop in value the money that is leaving Japan is driving down interest rates all around the world as Japanese investors scramble to find alternative investments. The money is moving into NZ, Australia and also the likes of Spain and Italy as Japanese investors try and move money out of Japan to avoid the dramatic debasement of the Yen. The Bank of Japan’s plan to double the size of the money supply over the next two years is an unprecedented monetary experiment relative to the size of the Japanese economy. They are in a sense trying to export their deflation as the price of all Japanese goods will drop dramatically in overseas markets. This will help keep inflation low in most western economies but be a blow to those who rely on exports to Japan.

In the markets, the Kiwi has extended its rise since the Bank of Japan announced their doubling of the money supply rising against all of our major trading partners. The NZDUSD has risen towards the mid to high .8500 area, whilst the NZDJPY rate now starts at 85.00.

Yesterday, China reported a surprise trade deficit for March as Imports rose more than expected. However a closer look at the historical data shows this is an annual event. It seems the trade picture is massively over stated each February and then revised down in March. It looks like normal data will resume from the April figures onward.

Australian consumer confidence dropped 5 points from 110.0 to 105.0 casting doubt on the Reserve Bank of Australia’s views that last year’s rate cuts are finally having an impact. We remain of the view that more interest rates are needed in Australia but with the existing RB Governor recently re-appointed for another five years we are not holding our breath.

In the US, President Barrack Obama’s latest budget deficit reduction plan, which calls for USD 3.8 trillion of deficit reduction over the next ten years, looks destined to fail as the opposition Republicans will not agree to the planned tax increases for the wealthy. The US deficit is shrinking in annual percentage of GDP terms as the US economy continues to grow albeit at a gradual pace.

The Group of 20 major industrial countries met next week and the Yen will be high on the agenda. We may see some talk from Japan in the next few days designed to slow the fall of the Yen to avoid too much criticism of Japan’s currency debasement plan.

Ongoing demand from international investors has helped push the NZD higher overnight, with the NZDUSD rate testing the .8500 level, and rising above the 84.00 level vs. the Japanese yen. The main catalyst for the latest rise in the Kiwi has been the planned doubling of money from Japan, although the Japanese yen has stalled just short of 100.00 against the US dollar. Looking back at the history of the yen, it is clear that approximately every five years the Japanese try and weaken the value of the Yen. However, because Japan has a very controlled economy which is designed to produce a trade surplus, there is always upward pressure on the yen from exporters selling foreign currency and buying yen. So when this current bout of depreciation runs its course the yen is likely to resume its natural course of appreciation.

The NZ Institute of Economic Research (NZIER) yesterday released their latest quarterly Survey of Business Opinion (QSBO). This showed business confidence at a 15 month high, largely driven by the construction sector which is mega bullish on the future based on the Christchurch rebuild. Ironically their survey does not cover the farming sector, so takes no account of the drought. Maybe some of those Wellington based economists should take a drive out into the countryside?

The Euro has regained some more ground based on the fact that Europe are now well behind in the money printing stakes with Japan and the US firmly in printing mode. Even the UK pound made a small recovery on better February Industrial Production, which rose more than expected averting fears of a triple dip recession from the UK.

Looking at the markets, the kiwi is back at levels last seen in mid-February, just above .8500 vs. the USD. Importers would be prudent to take some cover here in case the rise falters as it has done previously. Exporters will be praying for rain to help drop commodity prices and in turn the currency.

The Japanese yen continued its free-fall overnight, dropping to 99.00 vs. the USD, down over 21% since late October. The dramatic plunge of the Yen comes after the Bank of Japan announced plans to more than double the money supply in Japan. This massive increase of yen in the financial system is designed to weaken the currency and boost exports, which it is doing. However the question is, will it help revive the domestic economy? Certainly the price of imports will sky rocket, but will this see demand for imports fall? Given static wages, it is hard to see how demand will rise.

From a New Zealand perspective, the plunge in the yen will mean cheaper cars, photocopiers and the like, but will see a huge drop in the value of exports. The lower cost of imports will be good news for the Reserve Bank, but they warned yesterday about rising house prices restarting a wave of consumption based borrowing. It seems they are unsure of what they want to have happen after outlining in detail why they would cut interest rates if we had a persistently high currency in the last Monetary Policy Statement just three weeks ago. Some clarity is needed when the RBNZ next review rates on 24th April.

In the markets, the Kiwi is higher across the board on the back of the RBNZ comments, with the NZDUSD now in the mid .8400’s and the NZDJPY now starting above 83.00. The Kiwi is also stronger against the AUD as we are seeing a general move away from the Aussie dollar reflecting generally weaker Asian currencies. The Aussie tends to be a proxy for Asia, rising when the Asian currencies rise and falling when they decline.

The other source of demand for the NZD is coming from bond investors who are buying NZ Government debt. New Zealand is close to gaining a place in the Citibank World Government Bond Index and as such, international investors are buying up NZ Government debt which is pushing the interest rates down sharply. The yield on the 10 year bond is now 3.40%, down over 0.50 % since late January. The extra demand for the debt is also boosting the currency.

So cheaper imports, lower borrowing costs and rising house prices all add up to good news for households, but bad news for exporters. One gets the feeling we have seen this movie before.

Courtesy of CNS Analytics

The US economy added 88,000 jobs in March, well down on the 190,000 expected as Government spending cuts weighed on hiring. However, the unemployment rate dropped one notch to 7.6% as the participation rate dropped to its lowest level since 1979. This means that over 500,000 workers dropped out of the workforce and it is the clearest sign yet that the baby boomers are starting to retire. The baby boomers refer to a generation that were born between 1946 and 1964. There was a massive increase in births after the Second World War and this population surge has had a major influence on western economies as they have moved through from childhood into home buying and in turn raising their own kids. Now they are starting to retire in greater numbers and the effects will be felt across the western world.

The US Federal Reserve now has another dilemma as the falling unemployment rate brings closer the end of QE. Will the Fed stop printing if/when the jobless rate gets to 6.50% as they have stated and if so, how will markets react? Many financial markets are artificially priced because of the effect of all the cheap money the Fed has pumped into the financial system. Will those markets remain at their overinflated levels once the printing stops?

In the markets, the lower jobs number knocked US shares lower, saw long term US interest rates tumble and the US dollar weaken. The kiwi has held steady against the USD around the .8400 mark but did gain vs. the AUD, with the NZDAUD cross back up at .8100.

The Yen continued its plunge after the Bank of Japan’s plans for a mega printing of Yen. Other Asian countries are scrambling to try and lower their currencies as well, to try and maintain competitiveness with Japan. The Chinese Yuan, which is pegged daily to the USD has tended to strengthen as most of the Yen selling has led to USD buying. China needs a stronger currency to offset domestic inflation Also by having the currency rise it helps fuel the growing demand for imports as the economy grows. China is following a very similar path to Japan through the 1960’s and 1970’s when the Yen appreciated 50% from 260 Yen against the USD to 120 Yen.

Data on the radar this week includes Australian job ads and Japan’s account balance out today, followed by Aussie business confidence and NZ’s business opinion tomorrow. On Wednesday we have Aussie consumer confidence and for the end of the week, we have Aussie unemployment followed by the US’s jobless claims ant the Eurozone’s industrial production that evening.

The Bank of Japan exceeded market expectations with their mega money printing announcement yesterday. They plan to print a total of 7 trillion yen a month, up from the current 3 trillion a month. This equates to approximately USD 78 billion and nearly matches the US’s 85 billion a month of asset purchases. The Japanese move is aimed at achieving an inflation rate of 2% within two years. Essentially, the move is designed to weaken the yen and this was indeed the immediate result with the USDJPY rate rising 3 cents in favour of the US dollar. The Kiwi dropped against the USD after the Japan news, reflecting the broadly stronger USD. However the NZDJPY rate has risen 2 cents on the back of the weaker yen.

International investors whose currency choices are mainly restricted to the big three currencies being the USD, Euro and Yen are likely to favour the USD. The US has the best growth prospects and looks likely to end money printing well before the other two.

Global commodity prices continued to fall, also reflecting the stronger USD, with Gold falling to its lowest level in over a year and the price of Oil also dropping sharply. The lower Oil price will be a further boost for the US economy.

Overall, Japan remains a basket case with the Governments debt to GDP ratio already at 250% and now heading towards 300% (remember they said Greece was unsustainable at 140%!). Europe remains a mess and it won’t be long before they print more money to try and revive their recession bound economy. The European Central Bank met last night and indicated they would cut the cash rate next month, reinforcing the view that they are hopelessly behind the curve.

For NZ exporters fighting the endless tide of money printing from overseas, hedging on dips will remain the best bet and praying for some form of global anxiety attack that creates a better longer term hedging opportunity. The NZ Reserve Bank will leave the cash rate at 2.50% and have no choice but to try and control bank lending via regulation rather than interest rates. NZ importers can continue to play pick the top, holding some forward cover to ride out the dips.

Traders around the world are nervously awaiting the outcome of the two day Bank of Japan meeting which concludes tonight NZ time. Expectations are that the BOJ will print more money to buy more Japanese Government debt in an effort to push down interest rates. However, with credit demand almost zero in Japan, the real purpose is to weaken the yen to try and import some inflation by driving up the cost of imported products. The flaw in the plan could be that by driving up the cost of food and fuel, the demand for credit shrinks further. Japan is also battling an ageing population who are less inclined to borrow.

We are focused on the yen because of the record number of speculative bets that the JPY will keep falling. If these bets are unwound, then we will get a large move which will also have an impact on the Kiwi and other markets.

In the US, share indices that tested record highs are all down sharply this morning as economic data disappointed the markets. The service side of the economy cooled slightly in March from February and early estimates of Friday’s jobs report suggests the rate of job growth has also slowed.

Tonight we have the ECB and BOE reviewing interest rates. There is no change expected from the UK with the current Governor Mervyn King only having three months left in his tenure. The European Central Bank meeting should hold greater interest a week on from the debacle that was the Cyprus bailout. One would imagine that the ECB feels the need to do something to reassure investors that their money is safe within the Euro. However, the markets are not expecting any bold initiatives from the ECB at this stage.

Finally Australian trade data for March was better than expected, which briefly boosted the AUD late yesterday. The buying has not been sustained though and both the Aussie and Kiwi start the day at similar levels to yesterday with the NZDUSD close to .8400.

The NZ dollar has pushed higher overnight, trading up to the .8400 level vs. the USD after the ANZ commodity price index surged 7% to its best level since 2011. The drought conditions covering most of the country has seen a price surge, but whether the higher prices will be enough to offset the lower volumes that will be produced remains to be seen.

Also boosting the Kiwi was news that the Reserve Bank of Australia left rates unchanged and hinted that they may be holding steady at 3% for the foreseeable future. RBA Governor Glenn Stevens said ‘there are a number of indications that the substantial easing of monetary policy during 2011 and 2012 is having an expansionary effect on the economy’. The market took this as a sign that the RBA will not cut rates further, boosting the Aussie dollar by 0.50 cents.

In Europe, higher unemployment weighed on the common currency with the jobless rate rising to 12% for all of Europe. At the extremes, you have the like of Spain and Greece with 25% unemployment and German at 6.9%. These divergences will keep Euro tensions on the rise and ensure that the Euro stays weak.

The British pound was also sharply weaker after data showed that factory output contracted more than expected in March. With the Eurozone mired in recession, it is hard for the UK to recover and their fate will be tied to that of their major trading partner for many years to come.

Overall, we have been looking for some sort of shake-out in the markets for the last few weeks, with our view based around some re-rating of the Japanese yen. We still see this scenario broadly unfolding and will watch the Bank of Japan two day meeting today and tomorrow with great interest.

The Japanese Yen gained 1.0% vs. its major trading partners ahead of a two day meeting by the Bank of Japan this week. The big question is, will the newly elected Governor exceed market expectations for more money printing or not? The BOJ have a long history of underwhelming the market and we know that the speculative community maintain record bets on a further decline of the yen. It will be hard for the BOJ to exceed market forecasts and so we may get some further Yen appreciation over the next few days. The NZDJPY rate has dropped from 79.00 before the Easter break to 78.00 this morning.

In the US, the institute for Supply Management survey of business output fell in March to 51.3 from 54.2 in February. This news knocked the markets as the US has had a long run of positive economic data. The two big Government owned mortgage lenders Fannie Mac and Freddie Mae are set to return USD 50-100 billion to the US Treasury over the next year as the housing market recovery continues. As house prices rise, more and more borrowers are able to sell and or service their loans thus improving the two lenders fortunes.

The European Central Bank also meet this week with no change expected. One would have thought that fresh from the debacle of Cyprus, the ECB would feel the need to do something to revive the Eurozone economy but analysts are looking for no change to the ECB’s 0.75% cash rate. The Euro has recovered slightly from last weeks selling but we think most investors would prefer to place their money in safer places than a Euro bank account.

Finally, the Reserve Bank of Australia review interest rates this afternoon with again no change expected. The economic data has improved slightly in the last month although the April update for unemployment should see some correction to the ‘best ever” data from March. Whilst the RBA will comment about the Aussie Dollar being overvalued it is having the effect of keeping inflation low thus making the RBA’s job that much easier.

The Kiwi starts the day back in the high .8300 area vs. the USD but down a bit vs. the slightly stronger Euro and Pound.

The Euro dropped another cent vs. the USD overnight ahead of moves by Cyprus to re-open its banks, which have been closed for the last twelve days. Cyprus is preparing to announce new capital controls that will ban the cashing of cheques and limit the amount of Euro cash that can be taken across the border to just €3,000. We expect the final details to be released this afternoon and then the banks will re-open tonight NZ time. It seems logical to expect deposit holders with more than €100,000 to try and remove whatever is left of their savings for fear of another tax/levy on their funds.

Concerns about Europe have weighed on financial markets around the globe, with US shares falling and long term interest rates dropping as well. In the currency markets, the kiwi has dropped back nearly 0.50 cents vs. the USD, but maintained its gains vs. the weaker Euro. The Japanese yen has gained in value on safe haven buying and some disappointment with the moves by the new Bank of Japan Governor Haruhiko Kuroda. He plans to extend the buying of Government bonds from three years to five years, when the market had been looking for him to buy 10 and 30 year Government debt. Kuroda also said that the new actions by the Bank of Japan would not be enough to end deflation and that the Government needed to do more.

In New Zealand yesterday, the ANZ business confidence survey results for March were released and they showed a 5 point drop in both business confidence and businesses own activity outlook. Predictably, it was the livestock section that showed the biggest decline, although this was from a sharply higher reading in February. Also on the wires yesterday was Fonterra announcing a 30 cent increase to the value of the milk solid pay-out. However, they gave little guidance on the effect of the drought which seems strange, as we would have thought they would have some idea by now of the likely impact on production.

Today we get the Reserve Bank’s latest numbers on credit growth across the three main sectors of agriculture, business and household lending. Both agriculture and business lending slowed in January, whilst household lending continued its pick up and latest real estate reports suggest that February will see a further rise from the current modest 3.8% annual growth. The data is released at 3:00pm today.

The New Zealand dollar looks to be benefitting from a general move away from the Euro as the problems in Europe look set to spread to other weak nations. Both Slovenia and Hungary are trying to get bailout deals from the EU to prop up their banking systems, but with Monday’s Cyprus deal ‘bailing-in’ depositors, their deals are now less likely. Whilst some EU finance ministers have tried to play down concerns about the bail-in deal, the Dutch have made it very clear that this is the new method of bailing out countries. The result will be runs on banks that are deemed in need of support, so that depositors can avoid the 40% haircut on their holdings over the EUR 100,000 threshold.

The Kiwi starts the day in the high .8300’s vs. the USD and above .6500 vs. the Euro. Both the Kiwi and the Aussie dollar are benefitting as the markets sees both Reserve Banks on hold for some time.

Yesterday’s February trade data for NZ showed a surprisingly large trade surplus of NZD 414 million vs. expectations of a flat result. A surge in dairy exports to China was the main reason for the rise, however this will prove short lived as the drought takes its toll.

In the US, strong housing data suggests the housing recovery is alive and well. US house prices rose 8.1% from a year ago and new home sales recorded their best January/February combined numbers since 2008. Despite the better news from the housing sector, consumer confidence again fell as people worry about the effect of government cutbacks.

Today sees the release of the monthly business confidence survey from the ANZ bank at 1pm. It will be interesting to see if there are any signs of the drought affecting the overall result. The survey has tended to be counter cyclical over the years, over-estimating growth in the slow years and under-estimating growth in the boom times.

Financial markets have fallen across the globe overnight after the details of the Cyprus bailout deal were released. The deal sees Cyprus get its €10 billion bailout, but at the expense of the number two bank, The Cyprus Popular Bank, which will be closed and up to 40% losses for deposit holders with over €100,000 in the other main banks. This raises questions about how safe people’s deposits are in other countries, where banks are under pressure including the likes of Spain and Italy.

Ironically the Russian Government seems OK with the deal, even though it will be Russian depositors who will be most affected. It seems Russia decided the situation was beyond repair and has therefore decided not to offer any more aid to Cyprus. They are going to extend the terms of a €2.5 billion loan to Cyprus and cut the interest rate, but this is merely a token gesture.

So, the long running Europe saga takes another turn for the worse. The wealthy northern members who have grown tired of bailing out their indebted southern members now have a new way to deal with countries in trouble and that is to take away bank deposits. This will see deposit holders move their funds from southern European banks into the safe northern banks, thus putting more pressure on Spanish banks in particular.

In the markets the Euro is down nearly 2 cents vs. the USD from last week’s rebound and is back close to its recent lows. International investors are understandably wary of putting funds into Euro’s. The yen has gained at the Euro’s expense, with investors seeking the somewhat safer haven of the Japanese banking sector. Also boosting the yen has been growing calls from South Korea, who are complaining to the G20 group of countries that the recent plunge in the value of the Yen is unfair. Little will come of their complaints, but it highlights growing regional tensions over currencies. The Kiwi has held up relatively well, still starting the day around the mid .8300 area and making gains towards .6500 vs. the weakening Euro.

New Zealand trade data for February is out this morning at 10:45, with a small deficit expected at a time when NZ would ordinarily enjoy a strong export surplus. As the drought drags on, the trade data over the next few months will paint a grim picture and give useful clues as to the size of the overall hit to GDP growth.

Today looms as the make or break decision day for Cyprus, as European Ministers are meeting now to discuss terms of a new bailout deal to save the small island nation from bankruptcy. The ECB said they will not continue making loans to bankrupt banks and so a deal to re-capitalise the banks must be agreed today so that the banks can re-open Tuesday Cyprus time. The talk is that deposit holders at the Bank of Cyprus Ltd, the biggest lender, will see a 20% levy of deposits over €100,000 and there will be a 4% levy on deposits over €100,000 at other banks. Deposits under €100,000 will not be taxed, as they are meant to be protected under the deposit guarantee scheme that operates across the Eurozone.

The markets have assumed that a deal will get done and are back trading as business as usual with the kiwi holding its post GDP rebound to start the week in the mid .8300 area. The drought that grips all of the North Island is now considered the worst in 70 years and estimates of its impact are being revised upwards. However, the financial markets will not react until they see some actual real data which could be a few months away.

The British pound posted a further rebound on Friday night after better than expected retail sales numbers followed a week of officials trying to distant themselves from their earlier weak pound comments.

The Japanese yen is also slightly stronger despite the new BOJ Governor Kuroda saying he will do all he can to end deflation. The end of March is often a time of yen repatriation with exporters bringing back profits from overseas for tax purposes. So it will be interesting to see how the Yen trades in the next few days.

This week we have a shortened week due to Easter. The office will be closed on Good Friday and Easter Monday. On the data front, we have the NZ Trade Balance on Tuesday, followed by NZ business confidence on Wednesday. That night, we have the US and Eurozone business confidence, as well as US new home sales figures out. To round off the week, we have Aussie job vacancies on Thursday and US pending home sales that night.

The figures represented the best increase since 2009, helped by the Christchurch rebuild & a boost in agriculture.

The NZ dollar rose sharply yesterday and overnight after Q4 GDP growth data came in at +1.5% for the quarter and +3.0% for the year. It was the strongest quarterly increase since Q4 2009 and prior to that, mid-2005. The rise was driven largely by the Christchurch rebuild, but agriculture also made a solid contribution as did the volatile mining sector.

The kiwi has pushed up to the .8300 level vs. the USD and above .6400 vs. the Euro. The data has caused some analysts to revive rate hike calls, but they seem to be overlooking the severity of the drought, which looks set to knock 1% off 2013 GDP. On balance, we think the Reserve Bank will sit back and see how all of 2013 plays out before thinking about raising rates.

In Europe, weak manufacturing data added to the negative tone for the Euro, with even German manufacturing recording a decline. The Euro dropped back under 1.29 vs. the USD as the data added to the weight of the Cyprus situation. The European Central Bank said that they would stop providing emergency funding to Cyprus unless a bailout deal was agreed by the end of Monday 25th (Tues morning NZ time). Russia still looks the most likely source of an emergency loan, as it is Russian depositors who stand to lose the most in any deposit tax grab.

In the US, the Federal Reserve said it would carry on buying USD85 billion of treasury bonds and mortgage debt as it keeps printing money to help drive the recovery. However, there is talk that the current Fed Chairman Ben Bernanke will step down when his term expires in Jan 2014. Bernanke is quoted as saying that there are plenty of people who can manage the exit from QE, which is the clearest hint yet that he will retire. It also points to the end of QE in 9 months’ time. US share indices have risen to near all-time highs, boosted by the on-going supply of cheap cash. How the market will fair without the stimulus will be a big factor in the year ahead.

Cyprus voted a strong ‘No’ to the proposed deposit tax grab yesterday and are now back negotiating another bailout deal with the EU. Banks in Cyprus will stay closed until next Tuesday, to prevent a run on them by desperate depositors. It is possible that Russia may provide a loan to Cyprus, or might even take over some of the banks as it is the Russian depositors that stand to lose the most money from any planned tax.

The whole Cyprus story does highlight the on-going problems within the banking industry and raises the prospect of more regulation of banks, as some of them just do not seem to be able to curb their pre-crisis ways. It also raises some serious questions about the role of the ECB, who must have been aware of the crazy actions of the Cypriot banks. Ironically, the ECB has been providing emergency lending to the Cypriot banks since June last year, when Cyprus was downgraded to junk status because of the bank losses.

In the markets, the Euro has recovered some ground as Cyprus buys itself more time to come up with a bailout plan. However, the kiwi is still languishing in the low .8200 area vs. the USD and the low .7900 area vs. the Aussie dollar.

Yesterday’s Current Account data for NZ was slightly worse than expected, with the deficit creeping out to 5% of GDP. As usual, it is the interest bill on the overseas debt that is the main cause of the problem. The NZD 100 billion that the banks borrowed overseas and lent to NZ homeowners is going to take a long time to pay off. Not helping the situation is the poor trade data of late, as the Christchurch rebuild sees an increase in imports.

We get Q4 growth data today which is expected to be a strong outcome, but the drought will limit any gains from the numbers. The NZX have released a new index called the Pasture Growth Index, which tracks pasture growth conditions based on soil moisture, temperature and rainfall. In the last month the PGI has been just 50% of the 10 year average, so there is a sizeable hit to farm production and overall growth coming.

The US Fed finishes their latest meeting this morning and is expected to keep their USD 85 billion asset purchase plan in place. They are however expected to upgrade their growth outlook for the US to 3% for the next year, which will raise the prospect of an end to QE by December this year. Also worth noting is that Ben Bernanke’s term as Fed Governor finishes in January 2014.

Financial markets have lost ground overnight, as concerns about the situation in Cyprus weigh on markets. The Cypriot Parliament is currently voting on the EU proposal to tax deposits held in the nation’s banks. However, it looks as if the tax will not pass and there will be a further period of negotiation.

Cypriot banks have pulled in massive deposits from the likes of Russia, by paying higher interest rates than other European banks. They have in turn used this money to buy Greek debt which offered a high yield. However, with the write-down of Greek debt last year, the Cypriot banks have lost €4.5 billion of capital and they now do not have enough to operate within the EU’s banking rules. This is a similar situation to Iceland, who went bankrupt in 2009 when the banks became much bigger than the economy.

Despite the obvious foolishness of the Cypriot bankers, the EU would have been aware of the situation and their plan to grab depositors money to fund the bailout raises concerns about the safety of deposits in other countries like Spain that also have bank capital shortfalls.

Moody’s Investors Service said the move is bad for bank debt across Europe and shows policy makers are willing to disrupt markets to avoid sovereign defaults and a Euro break-up.

The markets are naturally becoming more cautious around the globe, with money moving out of shares and into long term Government debt. The traditional safe havens of the US dollar and Japanese yen are also rising, as international investors move money out of Europe.

The Kiwi has dropped down into the low .8200 area as it usually falls during these periods of risk aversion. The kiwi is also down sharply vs. the yen on the risk aversion, but has gained against the Euro.

The Euro dropped over two cents vs. the US dollar yesterday morning after news of the Cyprus deposit tax scheme broke. Overnight, the EU has told Cyprus it can vary the terms of its deposit tax scheme, but it must contribute the first EUR 5.8 billion of the bailout fund and then the EU will fund the other EUR 10 billion.

At the heart of the issue is the fact that approximately 30% of the deposits in Cyprus are from Russia, with a lot of the funds deemed to come from illegal sources. So the Germans are reluctant to bailout the Russian’s and German Chancellor Angela Merkel faces elections in September. Merkel does not want to be seen as the one who authorised the bailout, hence Cyprus must find its own share of the money.

Overall, markets have calmed after the initial sharp selloff first thing yesterday as Cyprus represents just under 1% of Eurozone GDP. However, one can’t help but feel that a precedent has now been set here and we would expect a steady flow of funds out of Euro bank accounts into US dollars over time.

The Yen gained as the Euro tumbled reflecting the flight to safety and the unwinding of speculative positions from those who had previously bought Euro and sold Yen.

In New Zealand, Consumer Confidence eased back in the latest Westpac survey which continues to point to growth around the 2% – 2.5% level. Tomorrow sees the release of Q4 Current Account data for NZ with most forecasts looking for a further deterioration in the deficit. The Current Account combines the net trade flows with the interest bill and profits going out to overseas owners of NZ companies. At the heart of the matter is our low rate of savings, but if the Government really wanted people to save more they would stop taxing interest earned on deposits and instead tax foreign borrowings. This would increase NZ deposit rates and discourage companies from borrowing cheaply overseas.

The kiwi starts the day back around the .8250 level vs the USD and steady at the .7900 level vs. the AUD. The Kiwi did drop sharply vs the Yen yesterday morning but is back above the 78.00 level this morning.

This week sees the release of growth data for NZ for the 4th quarter of 2012. Growth is expected to have rebounded to 0.8% in Q4 from the small 0.2% rise in Q3. However, the news will be over shadowed by the droughts effect on Q1 and Q2. The drought is expected to knock approximately 1% off growth this year, equating to approx. 2.5 billion NZD.

The currency is in the process of adjusting downwards to reflect the lower growth outlook, but at this stage the financial markets are focusing more on a steady cash rate at 2.5%, rather than factoring in a potential rate cut from the RBNZ to offset the effects of the dry summer.

In Cyprus, the bailout terms set by the European Union have sparked controversy with a proposed deposit tax raising fears of a run on banks. The tax will be charged at 6.6% on deposits up to 100,000 Euros and 9.9% on amounts greater than that. The tax is expected to be taken from peoples accounts prior to the banks opening tonight in an effort to stop people withdrawing their funds. However, even after the tax is taken a huge outflow is expected. Cyprus is getting a 10 billion Euro bailout, mainly of its failed banking sector. The main concern is that the moves in Cyprus could spark a run on banks across Southern Europe and possibly re-ignite the Eurozone crisis.

The British Pound has recovered some ground after Bank of England head Mervyn King said the Bank is not trying to lower the value of the Pound. Ironically, printing endless amounts of extra pounds is doing just that, but they say that is a by-product of what they do rather than the main focus.

In the US, inflation shot up as the money from their own huge printing operations starts to hit the real economy. New home prices have risen 15% as builders struggle to find enough workers to cope with the demand for new homes. Many workers who used to work in construction have now migrated to the more lucrative Oil and Gas industry in America’s Mid-West.

The Kiwi got a small boost on Friday night, as export demand for the NZDAUD cross in the low .7900 helped push the currency back up approximately half a cent vs. both the AUD and USD.

The Kiwi dollar starts the day lower across the board after the RBNZ said it would cut interest rates if the currency stayed high and growth falters. This is the clearest signal yet that the new RBNZ Governor means business on the high dollar and will take action to bring it down. The Governor also took a shot at the banks and their recent lending practices as the RBNZ said 30% of all new lending has been for mortgages that have been over 80% of the properties value and that 20% has been for loans of 90-100% of value. The RBNZ are working with the government to bring in new rules to control bank lending rather than resorting to a higher cash rate as they have in the past to slow the housing market.

Across the Tasman, the employment report came in at the highest in over ten years as the economy reportedly added 71,000 jobs in February. The jobs growth all came in Victoria and New South Wales, with the mining states of Perth and Queensland seeing job losses. The monthly jobs data is a very volatile series and we would expect some downward revisions to the data in coming months.

There are doubts growing about the recovery in China as the Government moves to curb housing speculation. Some forecasters are picking a 20% decline in Iron Ore imports which would have a negative impact on Australia.

In the US, more strong jobs data boosted markets with the latest weekly unemployment report showing unemployment filings dropped to their lowest level since September 2008 – the start of the financial crisis. Americans are shrugging off the governments spending cuts as the rebound in housing and super low interest rates drive the economic rebound.

The British Pound regained some ground after news that Qatar would invest billions into UK infrastructure projects spurred hopes for a pick up in the economy. The NZDGBP is now down 2% from its recent peak of .5550.

The Kiwi starts the day around the .8200 level vs. the USD but down sharply vs. the Aussie with the NZDAUD down around the low .7900 area.

The RBNZ left rates unchanged and said they will leave them flat through 2013. The Kiwi has dropped from .8275 to .8200 on the news as many of the local banks had been pushing the line of rate hikes and have had to sell out of those trades.

The Reserve Bank said that the domestic recovery remains uneven with the rebuild in Christchurch being offset by the overvalued exchange rate and the drag on growth from the Government spending cuts. They only touched briefly on the drought sweeping across the country saying “If dry conditions persist or intensify they could substantially reduce economic output more generally.” Given the severity of the drought it would appear that risks to economic growth are to the downside. Looking at the RBNZ’s growth forecast, growth is expected to peak in 2014 and then decline and this is without the impact of the drought being taken into account. We remain of the view that interest rates will be lower for longer and that the downward correction in the currency has further to run.

In the US retail sales surged +1.1% in February beating all estimates. It appears that the US economy is finally starting to rebound which will raise questions about the Fed’s plans to keep printing money and is positive for the US Dollar.

The Euro dropped vs. the USD after the retail sales news from the USA as Europe remains mired in recession whilst the US keeps growing.

The Kiwi is now well below .8200 vs. the USD and down in the mid .7900 area vs. the AUD as the market re-adjusts to the lower for longer outlook from the RBNZ.

The New Zealand dollar slipped back below .8000 vs. the Australian dollar overnight, as the market re-adjusts its expectations for the respective Reserve Banks. The RBA are expected to remain on hold at 3% for a while longer despite on-going soft domestic data. The RBNZ are also expected to remain on hold at 2.5%. The drought conditions spreading across NZ have taken away the tightening bias from the NZ outlook. So, the markets are starting to price back in a longer period of Australia having a slight interest rate advantage over NZ, hence the NZDAUD slipping back under .8000.

The Yen has staged a small rebound, after the opposition party in Japan said they would oppose the appointment of the new deputy Governor to the Bank of Japan. Kikuo Iwata is expected to endorse the extreme monetary policy easing of the Bank of Japan and so the opposition Democratic Party is trying to prevent his appointment. The DPJ want a more balanced Bank of Japan board amid growing concerns that the plunge in value of the Yen will hurt the economy by shrinking demand as households and businesses struggle to adjust to rapidly rising prices.

In the US, job openings increased as dismissals declined to their lowest level in 12 years. Companies are holding onto staff and the continuing economic recovery is creating more job openings. The rebound in the housing market is at the centre of the jobs growth as sales and construction boost the demand for labour.

In Europe, Jens Weidmann the head of the German Central Bank, known as the Bundesbank, said that Europe faces a period of declining inflation. This is the clearest signal yet, that European interest rates will cut in the next few months. Traditionally, Germany has been ultra-cautious on the outlook for inflation, so their comments on the inflation outlook carry a lot of weight with the European Central Bank.

One day out from the RBNZ, the main point of debate is how much the drought will impact on the RBNZ’s growth outlook and in turn their outlook for inflation. The RBNZ release their latest Monetary Policy Statement at 9.00am tomorrow.

The Yen dropped across the board overnight, after news that machine orders fell 13.1% in January vs. expectations of a 1.7% drop. Ironically the plunge in machine orders represents the flip side of the weaker Yen. As the Japanese currency tumbles the cost of imports sky rockets pushing up the imported cost of everything from food to capital items. Japanese businesses have responded to the sharply weaker yen by cancelling machine orders. The weak JPY is designed to boost the export sector, but with exports making up just 15% of the economy the other 85% will feel the effects of the significantly weaker currency.

In the US, the focus is on this week’s data with retail sales out Wednesday night expected to have increased by 0.5% and then inflation data due Friday night is expected to show a 0.5% rise. The increase in inflation needs to be monitored closely, as the downside to all the money printing in the US is a potential for rising inflation. Now that US banks are starting to lend again, the huge amount of printed money is finding its way into the real economy and starting to drive up prices.

The UK are also battling persistently high inflation and the Government look set to tell the Bank of England not to worry about their 2% – 3% inflation target and focus on economic growth. Persistently high inflation ultimately undermines a currency and the UK will need to be cautious in their approach for fear of losing investor confidence.

In New Zealand, card spending data improved modestly in January with a 0.8% rise, lifting the annual rate to 2.5%. There are several Banks in NZ suggesting that the OCR will be raised by nearly 2% over the next 18 months to cool down the housing market. These forecasts seem extremely unlikely given the headwinds from the drought, on-going cutbacks to Government spending and the high dollar. We see the cash rate unchanged through all of 2013 at a minimum and potentially well into 2014.

Courtesy of Mike Ryan Analytics

The worsening drought conditions stretching across New Zealand have exerted downward pressure on the NZD, with the NZDUSD rate closing at its lowest level since mid-December. The drought looks set to shave a full percentage point from GDP growth across Q1 and Q2 and will have the Reserve Bank on watch for a supportive cut to interest rates. The Kiwi dropped across the curve falling to the low .8000 level vs. the AUD. A drop back under .8000 would give manufacturing exporters a chance to take some more forward cover.

In the US, another strong jobs report was recorded with the economy adding 236,000 jobs in February, which helped push the unemployment rate down to 7.7%. The news saw long term US interest rates rise sharply as continued employment growth would see the Federal Reserve plan an early exit from their current extremely accommodative monetary easing.

Chinese data has shown the weakest start to a year since 2009 and retail sales rise at the slowest pace since 2004. Imports fell by 15% in February and whilst exports were sharply higher, there is some doubt about the reliability of those numbers. We would expect more downward pressure on the Aussie dollar this week after the soft import data.

The week ahead sees the NZ Reserve Bank give their latest update on interest rates, with no change expected. However, their comments on the droughts impact on growth will be keenly watched. We remain of the view that the Kiwi is on its way down to at least .8000 vs. the USD. Exporters need to place orders in the market to take advantage of the decline when it occurs.

The NZ dollar lost ground against the Euro, Aussie dollar and British pound overnight as drought concerns weigh on the outlook. The Kiwi did gain against the weakening Yen as the markets eye more money printing from Japan in April.

The Euro recovered ground after ECB head Mario Draghi said he thought economic conditions will stabilize in the Eurozone this year. The European Commission will allow troubled member states more time to re-balance their books and repay their debts. It is expected that both Portugal and Ireland will be given extensions on their debt repayments by as much as an extra 15 years. This might encourage the likes of Spain to ask for a bail-out and even Italy once they sort out their political mess. More transfers from the strong northern members to weaker southern members look likely.

In the UK, the Bank of England did not vote for more money printing as many had thought. This has seen the Pound regain some ground across the board. The UK operate a Monetary Policy Committee made up of 9 people, one of whom is the Governor of the Bank of England. This allows them to have a more balanced view of what action is required. In NZ however, we still rely on just the RBNZ Governor to make all the decisions.

Australia trade data was weak, with exports falling back on lower coal shipments. However, the markets are still rebalancing after the RBA left rates unchanged, so there was little reaction from the Aussie dollar. The NZDAUD crossrate has dropped into the mid .8000 area as a result, with concerns over the drought dragging the Kiwi down.

Finally the Yen dropped to its lowest level against the USD since 2009 after the final Bank of Japan meeting chaired by outgoing BOJ head Masaaki Shirakawa. His replacement Haruhiko Kuroda is expected to print more Yen from April onwards. The weaker Yen has seen the NZDJPY rate move back above 78.00.

Focus tonight will be on the US’s monthly jobs data, with a gain of 170,000 expected, but no change to the current unemployment rate of 7.9%. Locally we have Q4 manufacturing data numbers and house prices.

The NZ dollar has dropped back into the mid .8200 area vs. the USD as growing concern about the severe North Island drought outweigh a rise in Fonterra’s latest online auction. Milk powder surged over 10% in the latest auction as traders scrambled to secure supply of dairy product in the face of the worsening drought conditions. Estimates are that overall milk production could be down 10% – 15%, which will lead to lower overall growth and lower exports.

Yesterday, Australia reported 4th quarter growth, in line with expectations of a 0.6% rise. Q3 data was revised slightly higher, but Australia looks to be on track for annual growth of approx. 2.5% in 2013, lower than the last three years of mining boom fuelled growth.

In the US, strong private sector jobs data helped boost the markets, but this was offset by a surprise drop in manufacturing of durable goods. Government cutbacks on defence spending are dragging down the manufacturing sector in the US. Households continued to lock in lower mortgage rates, with a surge in mortgage approvals largely driven by refinancing.

The Canadian dollar fell further as the Bank of Canada said they have no plans to change interest rates anytime soon. The Canadian economy is slowing as a glut of cheap Oil in the US mid-west is limiting Canadian exports to the US.

The Bank of England began a two day meeting overnight, with the market looking for another GBP25 billion of money printing to be announced tomorrow. The Pound remained soft against all currencies. The UK has actively pursued a weak currency in an effort to help the economy remain competitive with the struggling Eurozone.

In summary, the Kiwi is struggling to rally as traders scale back bets on a further rise. We still see potential for a shake-out in the markets to push the Kiwi down towards the .8000 level vs. the USD and are encouraging importers to top up their cover before that drop occurs.