Since our last daily report there has been much to digest. Ahead of the Easter break, markets were in a risk-off mode and we’ve seen that unwind as the new week begins, with no sign of war in Korea (yet) and strong China data yesterday supporting sentiment. The S&P500 is up 0.6% while the VIX index has slipped from above 16 to below 15. European markets were closed overnight.
The NZD is flat-to-up slightly on the crosses since the local close on Thursday. It is remarkable how little change there has been since the local close on Thursday, despite the abundance of news. The USD is softer, with losses sustained after Trump talked it down on Thursday and soft US data adding to the mix. On Thursday, Trump kicked off a weaker USD and lower Treasury rates after an interview with the WSJ was published in which he commented that the USD “is getting too strong”. He left open the possibility of reappointing Fed Chair Yellen when her current term expires in February, saying that “I do like a low interest rate policy”.
On Good Friday, very weak US CPI data – the first monthly fall in the core CPI since 2010 – and soft retail sales data worked further in the direction of a weaker USD and lower rates (theoretically, as the US market was closed at the time) as they add a question mark to the pace of Fed tightening this year. While it looked like a confluence of factors dragged the inflation figures down well below expectations, another soft reading next month and the market will seriously question whether the Fed will even tighten again this year. The probability of the Fed raising rates again as soon as June has slipped to 45% while just over one full rate hike is now priced in by December. The Atlanta Fed GDPNow Forecast for Q1 GDP has nudged down to just 0.5% annualised.
Geopolitical factors have remained on the radar. The US military detonated its largest ever non-nuclear bomb used to target Islamic State forces in Afghanistan. North Korea tested a ballistic missile which happened to fail, while Trump has upped his rhetoric on North Korea, with “all options” on the table, according to Vice President Pence. Trump has urged China’s help, linking this to US-China trade relations. Trump tweeted “Why would I call China a currency manipulator when they are working with us on the North Korean problem? We will see what happens!”
China economic releases were strong, with aggregate financing, retail sales, industrial production and investment all much stronger than the market expected. China’s Q1 GDP rose by 6.9% y/y its strongest rate in 18 months.
The net result of the geopolitical factors, soft US data, and China data is the NZD pushing up to as high as 0.7036 in the early hours this morning, but it has since softened to around 0.7010. Softer risk appetite over the last couple of weeks has seen our fair value estimate push down to around 0.7240.
The AUD has pushed up to around 0.76, sustaining the gains seen after strong employment data on Thursday. NZD/AUD is up to just over 0.9230, a similar level to Thursday’s local close.
EUR/USD is up 0.3% to 1.0645, reflecting the soft USD and investors unperturbed by polls which show a close race for the first round of voting for the French Presidential election on Sunday. Support for the top four candidates ranges between 18-24%. If the polls are to be believed, then the far right’s Le Pen and independent Macron should win the first round vote, with Macron decisively winning the second round vote. This would ultimately be EUR-positive. NZD/EUR is at 0.6585, after reaching 0.6620 yesterday during Asia’s trading session, its highest level in six weeks.
USD/JPY continues to grind lower, a reflection of last week’s lower risk appetite and the softer USD post-CPI. It sits this morning around 108.70, its lowest level since mid-November. NZD/JPY is little changed from Thursday’s local close around 76.2. The same can be said for NZD/GBP at 0.5575.
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