by Raiko Shareef
NZ Dollar
The NZD/USD has seen a rollercoaster ride over the past 24 hours, but opens this morning just 0.1% higher at 0.8670.
Yesterday, domestic data remained strong at heart.
The ANZ Business Outlook survey saw its headline number fall, but we judge an increase in seasonally-adjusted terms – from +64.8 to +68.9.
The headline weakness in building permits was also overplayed, with a 22% y/y increase in ex-apartment consents more reflective of the strong trend. In all, considerable momentum remains in the domestic economy.
Aside from the JPY, which is weaker across the board, the NZD is generally lower against the major crosses, which have simply strengthened more against the USD than the NZD has.
The NZD’s extraordinary rally against the GBP and the EUR seems to have stalled somewhat around 0.5200 and 0.6290 respectively.
Notably, last night the IMF noted that the NZD remains overvalued, to the tune of 5% to 15%. The statement was part of a preliminary country assessment.
The IMF noted the myriad factors supporting the NZD, including interest-rate differentials and a favourable growth outlook. Lastly, the Fund signalled support for the RBNZ’s policy framework (which focusses on inflation and financial stability), and warned that one has “to be very careful if you feel like that should be changed in some way”. A clear shot across the bows for the likes of Labour and the Greens.
There are no releases due in NZ today, but early tomorrow morning sees the fortnightly dairy auction. We’ll be watching keenly to see if prices continue to moderate, as we expect they will over 2014.
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Majors
The USD is broadly weaker into the start of this data-heavy week, helped lower by dovish rhetoric from US Fed Chair Janet Yellen.
In a speech entitled “What the Federal Reserve is Doing to Promote a Stronger Job Market”, Ms Yellen was at pains to highlight the considerable amount of slack still present in the US economy. Most interestingly, she argued that most members of the FOMC see the equilibrium level of unemployment somewhere between 5.2% and 5.6% - well short of the current 6.7% (and a gap of at least 1.1%).
On the face of it, the headlines emerging from the speech were resoundingly dovish, and the market interpreted them as a retracement of her (hawkish) comments two weeks ago, where she noted that rate hikes could come six months after an end to quantitative easing.
But keep in mind that it took 13 months for the unemployment rate to fall from 7.9% to 6.7% (a 1.2% change). Another 13 months from here takes us to April/May 2015 – the same point she arrived to with her six months comment. Perhaps she was not being as dovish as the headlines suggest.
But markets see what they want to.
US equities outperformed those across the Atlantic, with the S&P 500 up by 0.8%, while the Euro Stoxx 50 is 0.3% lower. This is despite some decidedly mixed economic data, where the Chicago PMI missed expectations to fall from 59.8 to 55.9 in March (59.8 exp.), while the Dallas Fed Manufacturing Index rose from 0.3 to 4.9 (3.0 exp.). These are not as closely watched as the US ISM survey, which is due tonight.
One reason the EUR/USD is not considerably stronger this morning is the disappointing euro-zone inflation reading release overnight. The single currency bloc’s CPI for March printed at 0.5% y/y, marking a new cyclical low and coming in below market expectations of 0.6%. While dampening base effects will drop out in due course (as the ECB expects), the apparent lack of inflation-creating demand in euro-zone remains concerning. The EUR/USD is up 0.2% to 1.3780.
The only major currency to fall against the USD was the JPY, for two possible reasons. Firstly, the flurry of headlines recording high-level conversations between Russian and US foreign ministers, in a bid to de-escalate tensions around the Ukraine, may have soothed lingering market fears. Also helpful from this perspective was news that Russian President Putin has ordered a partial troop withdrawal from Ukraine’s eastern border. Secondly (and as we mentioned yesterday), speculation remains rife that Japanese asset managers will reallocate into domestic equities and international assets in the new financial year (which begins today). This saw the Nikkei up by 0.9% and the JPY 0.2% weaker against the USD to 103.10.
Today, sees China’s official manufacturing PMI for March, as well as the final reading of the HSBC version. Recall that the latter’s weak flash reading dismayed the market earlier this month. Later in the afternoon, the RBA is due to announce its policy decision, where comments on the AUD will be closely watched for. Tonight, the US ISM manufacturing index will be the data highlight.
Other news:
* German retail sales for Feb +2.0 y/y vs +0.8% exp.
* Canadian GDP for Jan +0.5% m/m vs +0.4% exp.
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