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Market Musing, Asia Pacific

Cross-Check: AUD/NZD – RBNZ: end of the line

At its May 2023 meeting the RBNZ looks to have delivered its last interest rate hike for this cycle. The 25bp move, which was predicted by most market analysts, takes the Official Cash Rate up to 5.5%, a high since late-2008. And as the chart below shows, following the very abrupt tightening phase which started in NZ in October 2021, interest rates are now well into ‘restrictive’ territory (i.e. above the estimated equilibrium neutral rate). According to the RBNZ rates will need to “remain at a restrictive level for the foreseeable future” to ensure inflation (now 6.7%pa) returns to the...

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Dancing on the US debt ceiling

US debt ceiling shenanigans, a repeated source of market volatility over the past decade or so, are rearing their head once again. After tentative progress was made last week negotiations look to have reached an impasse. Reportedly, the Republicans are continuing to push for sizeable reductions in government spending, particularly in areas such as healthcare, education, and housing, while also maintaining high spending on defense and the Trump-era corporate tax cuts. The two sides have agreed to resume talks with President Biden and House Speaker McCarthy set to meet on Monday, but things clearly remain fluid. The clock is ticking...

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US inflation: still a long way from home

Given its influence over US monetary policy and interest rates, which in turn shape broader asset and FX markets, trends in US inflation are critical to watch. Indeed, we would argue that while Australia’s inflation pulse influences domestic interest rates and the AUD, these impacts are swamped by US inflation developments as they can affect not only US macro-outcomes but also global growth expectations, credit spreads, commodity prices, global equities, and world bond markets. At a topline level, the April reading of US inflation shows that things are moving in the right direction. ‘Peak’ inflation is behind us, but genuine...

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Cross-Check: AUD/JPY – change is on the horizon

AUD/JPY has perked up a bit over the past few weeks, with the ~4% rebound since late-March helping push the pair back into positive territory for the year-to-date. In our view, the bounce back in AUD/JPY is unlikely to extend much further, at least not on a sustainable basis, and we would look to use any spikes back into the low- to mid-90s opportunistically. We think the unfolding macro environment is likely to see AUD/JPY fall back down to the mid-80’s over the coming months, largely as a reflection of JPY strength which we believe is likely to come about...

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Cross-Check: AUD/NZD – RBNZ Shock & Orr

AUD/NZD has slipped below ~$1.0630, touching a new 2023 year-to-date low in the wake of the diverging RBA and RBNZ decisions and shift in relative interest rates. The policy-driven Australia-NZ two-year swap spread has slumped to -175bps, the most negative since mid-2007. In contrast to the RBA who ‘paused’ its rate hike cycle and softened its conditional tightening bias at its April meeting (see Market Wire – RBA: over and out), the RBNZ unleashed its inner hawk and delivered another outsized 50bp hike. Consensus expectations were looking for a smaller 25bp lift, so the direction of travel wasn’t surprising, just...

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