By Mike Jones
NZD
There was no respite for the flightless bird on Friday. Investors’ new love affair with the USD continued, pitching the NZD/USD below 0.8100 for the first time this year.
Still, on a TWI basis, the NZD is only down around 3.4% from its late-May highs – indicative of the broad nature of the USD rally.
Last week was the second one in which a tidal wave of speculative, leveraged and model NZD selling overwhelmed steady buying from local exporters and fund managers.
As expected, last week’s IMM data revealed a sharp paring of speculators’ net long NZD position.
Meanwhile, our own Currency Flows Monitor shows net flows from our corporate clients were in the 99th percentile last week. In other words, local NZD buy demand has exceeded last week’s level only 1% of the time over the past two years.
We haven’t changed our NZD view in response to the recent slide. Not only was a near-term pullback already part of our view, but NZD fundamentals remain supportive and we don’t believe the conditions are in place to deliver a sustained rally in the USD just yet.
As a consequence, our medium-term forecasts for the NZD/USD to remain elevated this year haven’t changed (year-end target 0.8500).
However, for this week, further weakness is possible. Despite positive NZD/USD fundamentals, negative momentum (our momentum model went short at 0.8361) and a bearish technical picture (following the break of key support at 0.8080) have the upper hand. The next key level of support is eyed at the September 2012 lows around 0.7920.
There’s a smattering of local data to keep an eye on this week, with Tuesday’s RBNZ inflation expectations survey and Friday’s trade balance figures the most noteworthy.
However, sentiment towards the USD remains the bigger driver of the NZD/USD. And this looks set to be tested by Fed chairman Bernanke’s testimony on Wednesday. Confirmation from Bernanke that the Fed is going to stay the QE course may just temper some of the recent USD enthusiasm.
Across the Tasman, tomorrow’s RBA minutes will be important for the AUD to the extent they provide any hints a follow-up rate cut in June is likely.
NZD/AUD has been in a consolidatory phase of late; our short-term valuation model suggests ‘fair-value’ moved up slightly last week, to 0.8100-0.8300.
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Majors
The USD ended last week the same way it began, in the ascendancy. In fact, the USD index hit the highest level in six years on Friday.
More good news on the US economy was again the catalyst. The University of Michigan consumer confidence index (a survey that is rarely market moving) rocketed to a 6-year high of 83.7 (77.9 expected), underpinning a 2-9bps increase in US bond yields.
Once again, USD/JPY led the USD gains, as macro and speculative accounts continue to rebuild long positions. A new high above 103 was established in the pair, while the EUR, GBP, AUD, and CAD were all knocked lower.
It’s worth noting, the latest batch of IMM data shows speculative long positioning in the USD is looking increasingly stretched. Net long positions reached 250.7k last week, a one-year high and the second highest level on record.
Overweight speculative positioning and doubts about the true strength of the US economy has us a little cautious about expecting additional short-term USD gains.
We suspect the bigger risk is for a pullback. Notable in this regard were some comments from ‘Fed watcher’ Hilsenrath on Friday (after the close) suggesting low inflation means the Fed is in no hurry to “dial back” QE.
The Fed ‘tapering’ debate, and it’s implication for US bond yields and the USD, will remain front and centre this week. Investors’ focus is firmly on Fed Chairman Bernanke’s testimony before Congress and the FOMC minutes, both due on Wednesday.
We expect Bernanke to toe a familiar line, reiterating the Fed’s commitment to accommodative policy and noting the pace of QE (up or down) will be adjusted to reflect the state of the economy.
Elsewhere, the RBA and BoE also release their meeting minutes this week, and the BoJ has a policy meeting on Wednesday. Data-wise, investors will be looking towards Thursday’s Flash PMIs for Europe and China for a timely update on the strength of global manufacturing. Friday’s German IFO and US housing data will also come in for some attention.
Other news:
*Chinese home price inflation rises to 4.9%y/y in April – the fastest pace since April 2011.
Event calendar:
20 May: NZ PSI; UK house prices; US Fed’s Evans speaks;
21 May: NZ net migration; AU RBA Board minutes; NZ inflation expectations; UK PPI; US Fed’s Bullard and Dudley speak;
22 May: JN trade balance; AU consumer confidence; JN BoJ Kuroda press conference after policy meeting; UK public borrowing; US Bernanke testimony; US FOMC minutes;
23 May: CH HSBC Flash manufacturing PMI; EU Flash PMIs; UK GDP; US Fed’s Bullard speaks; US new home sales;
24 May: NZ trade balance; US durable goods orders; EU German IFO.
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