By Mike Jones
NZD
It was a wild ride in the NZD last week. After sliding to a mid-week low of almost 0.8050, the NZD/USD quickly recovered to finish the week broadly where it started around 0.8250.
Gyrations in USD sentiment were responsible for most of last week’s NZD/USD volatility. Wednesday’s FOMC meeting saw investors pare bets on the likelihood of further US policy easing.
US bond yields and the USD rose accordingly. While the firmer USD weighed on the NZD/USD, speculative selling had already put the NZD on the back foot. Indeed, last week’s IMM data showed the speculative community trimmed net long positions in the NZD from 17k to 13.2k contracts (long run average = 9.7k).
Nonetheless, it didn’t take long for the NZD to bounce back. This likely reflects the fact NZD ‘fundamentals’ remain broadly positive. Despite recent gains in US yields, the NZ dollar’s interest rate differential remains largely intact.
NZ-US 3-year swap differentials finished the week where they started around 255bps. Risk appetite is strong (our index sits at a lofty 72%), and NZ commodity prices are falling only gradually. All of this means we are likely to see solid demand for the NZD on any dips.
This is particularly so given a sustained rally in the USD still looks to be a story for next year at the earliest (see Majors).
Thursday’s Q4 GDP report will be the key local data release for the NZD this week. The market is looking for a 0.6% advance (2.2% y/y), in line with the RBNZ’s most recent forecasts. We expect 0.7% (2.3% y/y).
It’s not all abound GDP though. Wednesday’s Q4 Balance of Payments should confirm a (transitory) reduction in the annual current account deficit, to 3.9% of GDP (4.0% market), from 4.3%. Fonterra’s Wednesday morning auction will be more interesting than usual given the recent payout downgrade, and today’s Westpac consumer confidence figures will probably reveal a decent rebound.
Overall, we expect this week’s local data to maintain a positive tone, keeping the economic recovery theme alive. If we are right, we can expect more support for the NZD. However, this may come through NZD/AUD more so than the NZD/USD.
As we noted last week (NZD/AUD: Embarking On a Rocky Road Higher), we expect growth and interest rate differentials to move in support of a higher NZD/AUD this year.
In the near-term, solid NZD/AUD resistance is being encountered on bounces towards 0.7800. However, a daily close above 0.7830 would establish an uptrend and see momentum factors turn positive.
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Majors
The USD lost a little of its lustre on Friday as weaker-than-expected US data cast doubts on the speed of the US recovery.
US industrial production and Michigan consumer confidence figures both undershot market expectations. But it was US inflation figures for February that captured the most attention. The meagre 0.1%m/m increase in CPI ex-food and energy (0.2% expected) suggested the Fed is likely to maintain its easy policy stance for some time.
Ongoing buoyancy in risk appetite added to the headwinds facing the USD. European equity markets posted modest gains, the S&P500 rose 0.1%, and the VIX index (a proxy for risk aversion) slipped from 15.4% to below 14.5% – the lowest since mid-2007.
Nearly all of the major currencies notched up gains against the broadly weaker USD. From nearly 84.00, USD/JPY skidded back below 83.50, while the EUR/USD jumped over a cent to close the week at 1.3180.
Notwithstanding Friday’s moves, the big story of last week was the spike higher in US bond yields, and consequent strengthening in the USD. Not surprisingly, many investors are now wondering if this is the start of a sustained USD uptrend.
At this stage, our view is that it probably is not. To us, the recent gains in US yields and the USD mostly reflect the market pricing out the risk of additional easing (QEIII) from the Fed.
Before the USD rally can really get going, we need to see US interest rates begin to trend higher on a sustained basis.
This likely remains a story for next year. The Fed has only recently pushed back its guidance on interest rate hikes to 2014.
As such, it’ll be some time before the Fed starts contemplating tighter policy. So, in our view, the still-dovish Fed will act to limit the extent of USD strength in the short-term.
In any case, a long line of Fed speakers will give us plenty of insight into the Fed’s thinking this week. Chairman Bernanke is speaking twice, but we’ll also get comment from Dudley (twice), Kocherlakota, Evans, Bullard, and Lockhart.
Elsewhere, US housing market data should display further evidence of stabilisation, and the flash PMI estimates for the Euro zone are likely to confirm that the region entered a shallow technical recession in Q1.
In the UK, the 2012 budget will be the highlight of the week. UK February CPI (0.4% expected) and Bank of England minutes (unanimously on hold expected) should be relatively unexciting.
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