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NZ's GDP expansion greater than anyone expected, including RBNZ; NZ$ skyrockets up against majors

Posted in Currencies

By Mike Jones

NZD

The NZD has been the strongest performing G10 currency over the past 24 hours. The combination of skyrocketing NZ GDP and solid NZD/EUR demand has lifted the NZD/USD back above 0.8300.

At a time when much of the developed world is struggling to advance, NZ’s GDP soared 1.5% through the fourth quarter of 2012, taking the annual increase to a very respectable 3.0%.

The expansion was much bigger than anyone expected, including the RBNZ, which, like us, had picked a 0.8% lift. There was nothing weird in the Q4 GDP data, rather, growth surprised across a significant number of industries.

In isolation, the GDP data substantially reduce the RBNZ’s ability to wait until mid-2014 to raise interest rates and, indeed, the market now prices a roughly 35% chance of an OCR hike by year end.

The associated gains in NZD interest rate differentials emboldened both NZD/USD and NZD/AUD yesterday.

The rally in the NZD/AUD to almost 0.8000 has eliminated the ‘cheap’ valuation we noted yesterday. However, we expect further gains, targeting 0.8200 by mid-year.

Overnight, the EUR’s woes continued. Uncertainty about Cyprus continued to unnerve investors. But the bigger issue was a terrible set of European manufacturing PMIs.

Far from painting a picture of recovery, these actually pointed towards a deepening in the European recession. NZD/EUR was pitched from 0.6380 to nearly 0.6470 as the speculative community took aim at the EUR.

We noted at the start of the week NZD/EUR was biased to head higher. And with 0.6415 resistance now cleared, a climb to 0.6500 now looks likely.  

In yesterday’s Strategist, we suggested that a daily NZD/USD close above the 200-day moving average at 0.8305 would see momentum flip to positive, providing the impetus for a move back up into the 0.8280-0.8500 range. There are still risks from Cyprus and Italian politics, but we are relatively optimistic on these fronts.

Our medium-term view remains unchanged. We are firm believers that the NZ economy will continue to grow at a faster pace than our trading partners.

In addition, NZ commodity prices are trending higher, and the global economy is past the worst. These factors should keep the NZD on a gradual uptrend this year.

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Majors

The general underperformance of the EUR has been the key theme of the overnight trading session.  At the other end of the spectrum, JPY, AUD, and NZD have all posted solid gains. The mixed fortunes of the majors saw the USD track largely sideways.

Cyprus still doesn’t have a bailout deal, and pressure is starting to build. Officials are now discussing a “Plan B” which would involve some Russian aid and a reduced levy on bank deposits.

The ECB told Cyprus overnight it has until Monday to reach a deal or emergency liquidity will be withdrawn.

Investors so far appear willing to look through the Cyprus uncertainty, believing a deal will eventually be done. We agree with that view, but getting there is the problem and may involve some nasty moves in the EUR.

Not only has the EUR continued to suffer from uncertainty over Cyprus, but further evidence of the gulf between the EU and US economies also weighed overnight. 

The preliminary March PMIs for the Eurozone confirmed the recession continued in Q1, marking a likely sixth consecutive quarter of contraction. The German and French estimates both underwhelmed, at 48.9 and 43.9 respectively.

In contrast, US data suggested the recovery is getting stronger by the day. The March Markit PMI rose from 54.3 to 54.9 (54.8 expected) and the Philly Fed index soared from -12.5 to 2.0 (-3.0 expected).

From around 1.2940, the EUR/USD skidded back below 1.2900 amid heavy selling of EUR crosses. The decline in EUR/GBP (to almost 0.8500) was helped by a surprisingly positive UK retail sales report (2.1%m/m vs. 0.4% expected).

USD/JPY has copped a beating over the past 24 hours, sliding from above 96.00 to below 95.00. Incoming BoJ Governor Kuroda repeated his easing mantra at a press conference overnight.

But with this message now very well-known, the speculative community have sharply reduced JPY short positions, pitching the JPY higher.

Looking ahead, the only notable event risk on the calendar for tonight is the March German IFO. The risk here, following last night’s woeful PMIs, is that the expected pickup to 107.8 proves optimistic and the EUR/USD succumbs to another bout of selling. Key support for the single currency is eyed at 1.2850.

Other News:

*China posts a welcome rebound in its flash Mar manufacturing numbers after a clutch of weaker releases (51.7 from 50.4 and a consensus 50.8).

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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