Opinion: NZ$ drifts lower as US$ firms on better confidence, higher rates

By Mike Jones It’s been a topsy-turvy sort of night for the NZD. After heading up to nearly 0.7130 at one point during the night, NZD/USD subsequently drifted back to where it started, around 0.7090. Early in the night, the NZD/USD was underpinned by strengthening commodity prices and the firmer GBP. UK GDP and current account data outstripped the markets’ pessimistic expectations, prompting a rapid unwinding of GBP ‘short’ positions. As a result, GBP/USD jumped to nearly 1.5100, weighing on the USD and pitching NZD/USD above 0.7120. Solid gains in metals prices and news Australian mining companies are securing huge increases in iron ore prices also supported commodity-linked currencies like the NZD last night. However, the highs in the NZD/USD didn’t last for long. A late rally in the USD knocked the NZD/USD off its perch following more evidence the US economy is finding its feet. A rebound in US consumer confidence prompted further gains in US interest rates (10-year US Treasury yields have increased nearly 30bps this month), eroding some of the NZD’s yield advantage (NZ-US 3-year swap spreads fell to 294bps). This afternoon’s NBNZ business survey promises to be the highlight of the week on the local data front. Its last edition proved even stronger than we imagined, signalling GDP growth picking up to a 4% annualised pace. So whether it retains this momentum will be important in the context of early indications Q1 growth has moderated from Q4’s 0.8%q/q pace. There is also a spate of Australian data to watch out for today, including February retail sales. In the absence of a plunge in NZ business confidence, we suspect dips in NZD/USD will be limited to the 0.7030/40 region today. Easing fears over Greece’s fiscal crisis and month-end hedging demand should also support NZD/USD in the short-term. We look for a push towards 0.7200 in coming sessions. Currency movements last night are best described as a mixed bag. Overall, the USD continued to strengthen against most of the major currencies. But ‘commodity-linked’ currencies managed to buck the firmer USD trend. The night started out with a firmer GBP. Not only did ratings agency S&P affirm the UK’s AAA-rating, but last night’s data suggested the UK economic backdrop is not as bad as some had feared. Fourth quarter GDP was revised upward to 0.4% (0.3% expected), bringing the year to Q4 contraction to “only” 3.1% (-3.3% expected). In a similar vein, the UK current account deficit narrowed to £1.7b in Q4, compared to forecasts for a £5.1b deficit. GBP/USD drifted up from around 1.5000 to nearly 1.5100, which weighed on the USD initially. However, a slump in EUR and some upbeat US data ensured the USD finished the night on a firm footing. Greek funding issues reared their head again after a 12-year Greek bond auction found only limited demand from investors. 5-year Greek CDS spreads ticked up to around 320bps. At the same time, US economic data showed the US economy seems to be picking up steam. US consumer confidence surged ahead of expectations in March (52.5 vs. 51.0 expected) and the S&P/Case Shiller House Price index remained consistent with a picture of stabilisation. While US stocks were broadly flat, the stronger data saw US 10-year Treasury yields tick up 3bps to 3.89%, underpinning the late rally in the USD. USD/JPY was pitched to nearly 93.00 (the highest since January) and EUR/USD tumbled from 1.3480 to almost 1.3400. Despite the firmer USD, ‘commodity-linked’ currencies like CAD, AUD and NZD managed to hold their ground last night. The CRB commodity price index posted a modest 0.2% gain (driven by a 1.1% increase in industrial metals prices). Meanwhile, media reports suggesting BHP Billiton may have negotiated a 90% rise in iron ore contract prices may have also added support. Looking ahead, the global data calendar is fairly light until March US non-farm payrolls is released on Friday (+190,000 jobs are expected to be added). In the absence of a positive surprise from non-farm payrolls, we suspect bounces in the USD index will be limited to 82.00 this week, ensuring dips in EUR/USD are limited to the 1.3350 region in the short-term. Still, we doubt we’ll see EUR/USD back above 1.4000 anytime soon, with interest rate differentials and a fairly dim Eurozone growth outlook now conspiring against the currency.) *All of the research produced by the BNZ Capital team of economists is available here