Stronger NZD gets boost from dairy auction, poor US data, and may get a further boost if US Fed rate hike plan changes

By Kymberly Martin

The USD index fell sharply overnight, benefitting all its peers. The NZD was among the best performers over the past 24-hours.

Most currencies were trading in a fairly orderly fashion until the early hours of this morning when the US non-manufacturing ISM index was released. At 51.4, the index showed the US services sector remained in expansion, but the reading was a sizable fall from the previous month’s, of 54.9.  Whether a quirk, or a sign of substantial slowdown, the USD index promptly fell sharply.  From 95.6, the index soon found itself trading around 94.80.

While US bond yields also fell sharply overnight, the S&P500 has made a modest gain. The equity market seems to see some data weakness as a positive. i.e. it may create sufficient uncertainty to keep the Fed at bay, but may not be weak enough to suggest the economy is really ailing.

All the USD’s peers were launched higher. Notably, the GBP/USD now trades at 1.3430, its highest level since mid-July. It is now approaching the upper end of the broad 1.28 -1.35 range it has traded following its ‘Brexit’ inspired plunge.

The AUD and NZD had been on the ascendancy since yesterday afternoon. They were then catapulted higher in the early hours of this morning as the USD plunged. Sentiment toward the NZD was also likely bolstered by another solid gain at this morning’s GDT dairy auction. The average price index rose 7.7% from the previous event.

The NZD/USD now trades near 0.7420. This is its highest level since May last year. As last night’s response shows, the longer-term fate of the NZD/USD remains firmly in the hands of the USD. Our expectation for some softening in the NZD/USD by the end of next year is predicated on our core expectation for three Fed hikes within this period. If the Fed does not deliver, then there is clear upside risk to our NZD/USD forecasts.

The level of the NZ TWI is also notable. At close to 78.60, it is at its highest level since April last year. This will simply add the RBNZ’s headache as it eyes its elusive 2% CPI inflation target.

The ADU/USD showed limited reaction to the RBA’s statement yesterday. However, today’s release of AU Q2 GDP has the potential to prompt some response. Our NAB colleagues look for 0.6% q/q (aligned with consensus), but with risks towards the upside. The forecast is higher than the RBA’s 0.4% q/q expectation, with government spending likely the main surprise.

BNZ Markets research is available here.