by Kymberly Martin
NZ Dollar
The NZD/USD sits a little higher at 0.8350 this morning, having touched as low as 0.8300 overnight.
The biggest event locally over the past 24-hours was the release of the disappointing AU employment report yesterday afternoon. As anticipated, the NZD/USD was initially dragged a little lower in sympathy with the harsh downshift in the AUD/USD.
However, the NZD/USD has managed to find its feet overnight, climbing back up to trade at 0.8350 currently.
The NZD/AUD rocketed higher on the AU data release. From 0.9360, the cross gapped to 0.9440 yesterday afternoon, before creeping up to 0.9480 currently. This is the highest level on the cross since late 2005.
We have been at the forefront of highlighting the diverging economic prospects on either side of the Tasman. However, we believe these fundamentals have now been well reflected in the cross.
Yesterday, post the AU employment report the NZ-AU 2-year swap spread popped up to 101bps. The market ratcheted up expectations for an RBA rate cut this year, to above 50%. We see the 2-year spread peaking above 140bps, mid this year, as the RBA delivers a rate cut while the RBNZ is raising the OCR.
Still, even inserting this differential into our fundamental NZD/AUD ‘fair value’ model it is difficult to justify the cross at current levels. It looks increasingly stretched, in our view.
Today there is little scheduled on either side of the Tasman. For today, NZD/USD support is seen at 0.8300. Resistance is eyed at 0.8390.
------------------------------------------------------------------------------------------------------------------
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
------------------------------------------------------------------------------------------------------------------
Majors
The USD index trades at a similar level this morning, of 81.00. The AUD has been the weakest performing currency over the past 24-hours.
The tone of US earnings reports was not so positive overnight. Citigroup and Goldman Sachs led declines amongst banks stocks after reporting Q4 earnings. Citigroup disappointed analyst estimates as mortgage banking and fixed income trading slumped, both possibly reflective of the rising yield environment in the quarter. Overall the S&P500 is down 0.2% while the Euro Stoxx 50 closed down 0.6%.
Within currencies, the USD tracked sideways for the most of the evening ahead of US data releases early this morning.
US core CPI (1.5%y/y) was in line with expectation, giving the Fed plenty of flexibility in maintaining accommodative policy. The USD index fell along with US bond yields after the release. Later the Philadelphia Fed business outlook survey (9.4 vs. 8.7 expected) instigated a USD recovery. It has returned to trade at 81.00 this morning.
European currencies experienced some volatility around US data releases overnight. The EUR/USD fluctuated between 1.3600 and 1.3650, trading at the bottom end of this range currently.
But the biggest story in currencies over the past 24-hours has been the downward move in the AUD. The AUD has lost 1.8% relative to the USD over the past 24-hours. The AU report showed a decline of 22.6k jobs in December (+10k expected). The AU unemployment rate remained steady at 5.8% however, as the participation rate declined from 64.8% to 64.6%.
We continue to see the unemployment rate rising above 6% this year, necessitating a further RBA cut. Following the data release the AUD/USD gapped from 0.8900 to 0.8800 but has managed to stabilise at this level overnight. This is the below the December lows on the AUD/USD and its lowest level since August 2010.
Today, there is little scheduled on either side of the Tasman. Tonight, UK retail sales data will be released along with US industrial production, December housing starts and the University of Michigan Confidence survey.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.