By Mike Jones
NZD
The NZD fell victim to rising global risk aversion and speculative selling last week.
Around 1½ cents was wiped off the NZD/USD, while the NZD/AUD slipped from 0.8160 to around 0.8080.
On Friday night, the NZD/USD was side-lined. But worries about the state of the UK and European economies (see Majors) took a toll on the EUR and GBP, launching NZD/EUR and NZD/GBP higher.
While Italian election anxiety was the trigger, last week’s pullback in global equity markets and the NZD/USD can be characterised as a healthy correction from levels that were starting to look “overbought”.
Last week’s IMM data tells us that much of the NZD selling was from speculative accounts. Speculative net longs in the NZD were trimmed from an extremely high 24.7k, to a still high 20.3k.
Speculative selling was met with strong buying interest from local exporters. Indicative of such, our Currency Flows Monitor shows net NZD/USD flows amongst our corporate client base were in the 95th percentile last week.
In other words, over the past two years, net flows have been above last week’s level only 5% of the time. Much of this net buying reflected a rebuilding of hedges.
Our (aggregate) Exporter Hedging Index rose from an average of 4.1 months of forward cover, to 4.6 months. In our view, this ‘buy on dips’ approach is a smart strategy to cope with the ongoing NZD/USD appreciation we expect to see in 2013.
This week’s local data calendar yields the last of the partial indicators for Q4 GDP (construction, manufacturing, wholesale trade). Our Q4 GDP forecast currently sits at 0.7% (with upside risk).
Commodity price news kicks the week off though, with this afternoon’s ANZ indexes and Wednesday morning’s dairy auction. We expect another increase in milk prices, especially with this extremely dry weather hurting production.
Offshore, it’s a big week for central bank meetings and global data. Probably the two events with the most potential to shock the market are Thursday’s ECB meeting and Friday’s US employment data.
It is also a busy week in Australia. Tuesday’s RBA meeting, January retail sales figures, and Q4 GDP all have the potential to impact on the NZD/AUD. Note that, according to our model, NZD/AUD short-term ‘fair-value’ moved higher last week, to a 0.8050-0.8250 range.
All up, we suspect negative NZD/USD momentum and the break below key support at 0.8280 means NZD/USD will continue to leak lower in the near-term. The next big support levels are 0.8155 and 0.8080.
However, we doubt it will be long before the uptrend resumes. But for this to happen we’ll need to see some stabilisation in the global backdrop, perhaps via a government being formed in Italy.
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Majors
Last week’s trend for a stronger USD continued on Friday night. The USD index is now just over 4% above its February lows, at the highest level since August.
Not only did an uninspiring set of European PMIs unnerve investors, but the Italian political crisis continued to bubble away and the US$85b US ‘sequester’ spending cuts kicked in (after the March 1 deadline passed without any agreement from Congress).
Still, after initially plunging 1% or so, US equity markets managed to claw their way back into the black following a stellar US ISM manufacturing report (54.2 vs. 52.5 expected). Nonetheless, the ‘safe-haven’ allure of the USD saw the greenback post solid gains against all of the major currencies, bar the CAD, NZD, and SEK.
The GBP was a notable underperformer. GBP/USD collapsed from 1.5160 to 1.5050 after an abysmal UK PMI (47.9 vs. 51.0 expected) bolstered hopes for additional BoE easing.
For this week, central banks look set to hog the limelight. The RBA, Bank of Japan, and Bank of Canada are expected to keep policy settings unchanged. ECB and Bank of England policy meetings should be a little more interesting. Soft European activity and falling inflation has raised speculation the ECB could respond with more easing measures. A move this week is unlikely.
But any suggestions from Draghi at the press conference that a rate cut is being contemplated would likely send EUR/USD barrelling back below 1.3000.
The odds of the BoE topping up their asset purchase programme have certainly risen as well. Whether or not the BoE makes a move this week, the toxic mix of a flagging UK economy, persistently high inflation, and BoE jawboning should see the GBP continue to underperform.
As well as central bank meetings, it is shaping up as a busy week for US data. Friday’s non-farm payrolls figures will once again be the highlight. Analysts expect a 160k jobs gain and an unchanged unemployment rate of 7.9%.
Other News:
*February PMIs for France, Germany and Spain came in a little better than expected, albeit still in contractionary territory. However, the Italian PMI slid to a 3-month low and the UK version was simply awful. Aggregate EC PMI 47.9 (47.8 expected).
*Over the weekend, Chinese non-manufacturing index for February falls to 54.3 from 56.2 with the changing timing of the Chinese New Year explaining part of the fall.
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