DB FX Daily: London Watching Equity Markets; NZD post-RBNZ

[RTFX-Trading]

FX Daily: London
Watching Equity Markets; NZD post-RBNZ
Today's Key Data and Events
- NOK Manufacturing output for April, DB 0.3%/mkt 0.5% (08:00 GMT)
- GBP Bank of England rates ann. DB/mkt no change in rates (11:00 GMT)
- USD Jobless claims wk 2-June, DB 315k/mkt 312k (12:30 GMT)
- USD Wholesale inventories for Apr, DB 0.2%/mkt 0.3% (14:00 GMT)

Upcoming Event Risks
- June 6-8: G8 Summit
- June 14: SNB rate decision
- June 14: RBA's Stevens' speaks
- June 14: BoC's Dodge speaks

Equity Markets Bear Watching Over Coming Days
With jitters in equity markets having been a theme across the globe over the past few sessions, and with US stocks having ended Wednesday's session near their lows for the day, it's perhaps not surprising that the VIX has also moved higher. Indeed at the time of writing this measure of equity market volatility had moved out of its recent range. To date, volatility in FX markets has remained at very low levels, while key carry trades were relatively stable in the New York session. However, if we compare the current reading on the VIX to its 20 day moving average and plot that against our G10 carry basket (see the first chart below) we can see that while the VIX is not yet flashing red for carry trades, equity markets will continue to bear watching over current days.
[email]adam.boyton@db.com[/email]

RBNZ Hikes 25bps, Statement is Hawkish
The RBNZ hiked by 25bps, taking the OCR to 8.0% (the market was 40% priced for a rate hike heading into the meeting). While it acknowledged "There are some early indications. that growth may be starting to soften," it added "but these are by no means conclusive. Indeed, at present the risks to domestic activity appear to remain on the upside," indicating a significant risk of further tightening. On NZD they repeated the comments that "the exchange rate is at levels that are both exceptionally high and unjustified on the basis of New Zealand's medium-term fundamentals." Intervention by the RBNZ at the current point in time remains unlikely, however, a point reinforced when Governor Bollard told the following press conference that the phrase was not signalling the RBNZ will intervene. The tightening by the RBNZ has modestly boosted NZD, with the ongoing risk of further tightening indicated in the statement likely contributing this. More medium term, however, given the tentative signs that the earlier tightening in monetary conditions (from both the increase in domestic rates and the strength in currency) was already having an impact we suspect that there is now a reasonable prospect of the NZ economy slowing in coming months. We will be looking for opportunities for tactical short NZD trades into key NZ data - with next Thursday's retail trade data a possible candidate.

Perhaps more importantly for NZD is the overall FX carry backdrop noted above given that in our view this was responsible for much of the recent gains. It is also worth noting that with the summer months tending to be less favourable for risky asset markets in recent years (the old "sell in May and go away" theme), they have also been less favourable for NZD