In a world of low FX volatility on the majors, the interesting move through this week has been Aussie/Kiwi, with a further reversal seen overnight on the back of the latest rate decision and statement from the RBNZ. The move higher in the key rate to 3% was largely expected; the relatively hawkish tone to the accompanying statement was less anticipated. The Bank stated that inflationary pressures are increasing “and are expected to continue doing so over the next two years”. The statement as a whole suggests at least one more rate hike is on the horizon, but the bank also stated that they do not believe that the current level of the exchange rate is sustainable and removed the phrase “in the long-run” from the end of this statement between the March and April meetings. This could be taken as a sign that they are getting a little more uncomfortable with the level of the exchange rate, which is up 1% since the last meeting and up 0.35% after the rate decision overnight. Note that AUD/NZD has moved more than 1% lower, helped by the weaker tone to the Aussie after the latest inflation numbers this week.
For today, main focus for the market will be the German IFO confidence data this morning, where headline reading is seen heading down a little from 110.7, but note that the key measure of German business confidence remains near a 3 year high. Bigger focus in the Eurozone and for the single currency is deflation risks and the ECB’s potential reaction to them, which will be a growing focus into the next ECB meeting in two week’s time.