RBNZ Leaves Rates Unchanged, CAD Continues Towards 30 Year Highs (page 1 of 2)

DailyFX Fundamentals 09-12-07

By Kathy Lien, Chief Strategist of DailyFX.com

US dollar hits record low, record oil prices will not matter

The US dollar reached a new record low against the euro and a touch of 1.40 is now inevitable. There were no new drivers behind the latest move as the themes that have been resident in the markets over the past week continue to push the dollar lower.

Last Friday's horrid non-farm payrolls number marked a turning point for not only the financial markets but also for the Federal Reserve.

Previously the Fed was reluctant to lower interest rates because they did not want to give the markets the perception that they will bail out traders every time their excessive risk appetite gets them into trouble (Alan Greenspan did this often, coining the term Greenspan Put).

Now however, the weak labour market not only gives them a big excuse to lower rates, but they have no choice but to do so. In Europe on the other hand, economic data continues to surprise to the upside, validating the European Central Bank's (ECB) decision to leave the door open for another rate hike.

This dynamic has and will continue to be the primary reason why the dollar is weakening. No Federal Open Market Committee (FOMC) meeting in the past year has generated as much debate and uncertainty as the one on September 18. Traders are still divided on whether the Fed will lower interest rates if at all but the debate among economists is not whether the Fed will lower rates but instead, by how much.

According to the 117 economists surveyed by Bloomberg, 69 per cent expect a quarter point cut and according to a DailyFX Poll of 255 voters, only 48 per cent expect the Fed to move.

Oil prices also hit a new record high above $80 a barrel. If the US economy was not in so much trouble, this move in oil would have certainly stoked concern about inflation and speculation of higher interest rates across the globe. This time around however, the rise in oil will probably have no impact on the Fed's monetary policy decision.

There is no major US data due for release tomorrow, but on Friday we have retail sales, import and export prices, the current account, industrial production, business inventories and the preliminary University of Michigan consumer confidence numbers. Although some traders expect retail sales to confirm the weakness in the labour market, spending may not weaken dramatically until September and October.

Even so, there is no doubt that the US economy is weakening and more troubles are yet to come. Industry exports expect the mortgage sector to shed another 100,000 jobs over the next few months. Countrywide Financial has already announced 10,000 to 12,000 layoffs.

When the Fed moves to cut interest rates, it will not be just a one off cut. Instead, expect it to be the beginning of at least 75bp of easing.

RBNZ leaves rates unchanged, CAD continues towards 30 year highs

The Reserve Bank of New Zealand (RBNZ) left interest rates unchanged at 8.25 per cent today. This decision as well as the cautionary comments was widely expected by the market. Central Bank Governor Alan Bollard said that the high level of interest rates is hurting consumer spending and he expects US growth to slow, but at the same time, rising commodity prices and a weaker currency are boosting the economy.

The New Zealand dollar has performed extremely well over the past three trading days and tonight's retail sales number will be the last piece of data in an otherwise busy weak for New Zealand dollar traders.