By Mike Jones
NZD
The NZD has spent most of the overnight session licking its wounds following yesterday afternoon’s pummelling.
After tumbling from 0.8450 to 0.8370 in the wake of the RBNZ’s confirmation of “intervention”, the NZD/USD has mostly consolidated in a 0.8370-0.8415 range.
It was a busy day for New Zealand’s central bank yesterday. It released the May FSR, introduced the first of its macro-prudential tools, sounded hawkish, sounded dovish, and confirmed it had intervened in the NZD. Or did it?
Governor Wheeler’s comments about “intervention” appear to have been overblown and misinterpreted to us. From this perspective, the ¾ of a cent falls in the NZD/USD and NZD/AUD look like an overreaction.
We suspect the “intervention” Governor Wheeler was talking about was the “passive” intervention the Bank restarted in November last year.
We doubt the Bank has been involved in any bazooka-style “active” interventions – the conditions for such have not yet been met in our view. Passive intervention is generally done in smaller amounts and is not designed to influence the level of the currency – something Wheeler reiterated yesterday.
Indeed, since November, the RBNZ has only net sold a total of $291m NZD. This is but a drop in the ocean in a market that trades an average of US$32b a day.
Still, we suspect the Bank’s passive intervention stepped up a gear in April as the NZ TWI soared to fresh post float highs. We’ll know for sure when the April balance sheet figures are released on 30 May. Expect plenty of attention on these.
Looking ahead, we’re bracing for more NZD fireworks today. There is a heap of event risk on the slate. First up is the Q1 NZ Household Labour Force Survey at 10:45am (NZT).
This could either: 1) remain weak, which would likely be mostly dismissed by local markets or 2) catch up to the general improvement in other labour indicators.
In other words, the risks to the NZD look asymmetrically tilted to the upside. Formally, we’re picking a 0.3% rebound in employment and an unemployment rate of 6.7% (market 0.8% and 6.8%).
Later in the day, we get both Australian employment data and the Chinese CPI at 1:30pm (NZT). The Chinese CPI has been tracking around 2% for about a year so another result along these lines (2.3% expected) wouldn’t ruffle the market’s feathers.
However, Aussie employment is much more volatile and prone to surprise. The market expects an 11k jobs gain.
Overall, we hold a modest topside NZD bias on the day. Support is eyed around 0.8360, with initial resistance now expected to kick in on bounces to 0.8450.
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Majors
A jolt higher in the EUR/USD has been the most notable development from last night’s trading session. This, along with modest gains in equity markets, has dragged the USD lower. The narrow DXY index is around 0.5% weaker around 81.90.
On an otherwise fairly quiet night, an encouraging reading on German industrial production helped underpin the EUR.
March IP rose 1.2%m/m, well above the 0.1% decline expected. Coming just a day after the similarly upbeat German factory orders figures, the data has buoyed hopes Germany may yet avoid recession.
European equity markets climbed 0.4-0.9%, aided by robust corporate earnings, and the EUR/USD jumped ½ cent to around 1.3180.
The trend decline in peripheral European bond spreads remains in full force, something else that has tended to support the EUR in recent days. From 350bps in early April, Italian-German 10-year bond spreads have fallen to almost 250bps.
Spanish equivalents have plunged from 375bps to 280bps over the same period. As various commentators have noted, these declines are doing far more to ease European financial conditions than the ECB’s 25bps refi rate cut.
Still, while EUR/USD and EUR cross buying has been the main theme of the night, the NOK has actually been the strongest performing currency. This follows the Norges Bank’s decision to leave rates unchanged. This was in line with the consensus expectation, although there had been some speculation about a 25bps cut.
The GBP will be in focus tonight. The Bank of England decision should be a fairly boring affair. We expect the MPC to keep rates at 0.5% and asset purchases capped at £375b as it waits to see whether credit easing measures will boost activity.
However, keep an eye on UK manufacturing and industrial production data. Should evidence of a bottoming in activity shine through these figures, the short-squeeze in GBP/USD may well continue. After all, short positions are still relatively large. A move back above 1.5600 is possible.
Other news:
*Chinese export growth picked up to 14.7%y/y in April, with imports surging 16.8%y/y – both above expectations.
Event Calendar:
9 May: NZ HLFS; CH CPI; AU employment; UK BoE meeting, and industrial & manufacturing production;
10 May: AU RBA SoMP; G7 finance ministers/central bankers meet; US Fed’s Evans, Bernanke, and George speak.
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