The NZD will be glad to see the back of this week, pulling up bruised as a result of a poor Q1 GDP report. Its 0.9% daily loss as at the time of writing is flattered by broader USD weakness overnight.
The AUD has outperformed, helped by interest to test NZD/AUD’s 18-month lows.
Having tracked recovered from below 0.69 to above 0.70 as a result of yesterday morning’s FOMC decision, NZD/USD was pummelled back below 0.69 in short order thanks to the Q1 GDP report, which significantly undershot expectations.
At one point, NZD/USD was 1.5% weaker for the day. Much of the miss in GDP, relative to our forecasts, came from a sharp fall in Information, Media and Telecommunications, a category that is about half the size of the he manufacturing sector.
We forecast a solid bounce in Q2, back up to 0.8% q/q, but the broader picture is one of slowing trend growth in NZ.
The saving grace for NZD/USD was a broader inclination to sell USD, as investors mulled the FOMC’s softer future rate track.
While the median 2015 ‘dot point’ still implies two rate hikes this year, the distribution of those dots shifted such that fewer members saw two rate hikes this year, relative to March.
With the Fed’s inflation mandate top of mind, the soft US CPI print will have made more an impression on investors than the positive surprises in the Philly Fed Index and initial jobless claims.
The USD eventually regained some poise, thanks to rising US Treasury yields. We continue to be wary of a modest (and temporary) squeeze higher in NZD.
Holding a short NZD/USD position is not cheap, and we imagine leveraged investors will grow frustrated once downside momentum weakens. There is good technical support just below 0.69.
The current break lower in NZD/AUD might keep the speculative community interested for now, looking to break the 18-month low of 0.8850.
That level came under scrutiny last night, but seems to have survived the test. We think a 0.88 – 0.92 range will prevail though the rest of 2015.
The data calendar is relatively bare heading into the weekend.
The first Fed speakers post-FOMC will garner attention, but are unlikely to provide fresh direction. Some focus will no doubt remain on Greece, where an emergency summit has been called for Monday.
Alarming headlines abound overnight, but the market continues to expect a deal to be struck.
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Raiko Shareef is on the BNZ Research team. All its research is available here.
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