By Mike Jones*
The NZD was the strongest performing currency last week. From around 0.7650 at the start of the week, NZD/USD climbed steadily to reach a 30-month high a smidge below 0.8000. Sure, USD weakness played a part. Confirmation that the US Federal Reserve will buy an extra US$600b in Treasury bonds and adjust its quantitative easing program “as needed” certainly knocked back USD sentiment.
In fact, the USD index fell to the lowest level in 11 months. But there were also a few NZ-specific positives for the currency last week. Indicative of such, the NZ trade-weighted index surged nearly 3% over the week to the highest since June 2008. Thursday’s surprisingly strong HLFS labour market figures lit a rocket under the currency.
The 1.0% lift in employment in Q3 was double the 0.5% jobs growth expected by the market. In response, interest rate markets brought forward the timing of the next RBNZ interest rate hike to March (thereby siding with our expectations) further enhancing the yield advantage of the NZD. NZ-US 3-year swap spreads jumped from 345bps to two year highs around 365bps. It’s worth noting, recent NZD/USD gains don’t look out of line with short-term “fundamentals”.
Indeed, according to our short-term valuation model, NZD/USD “fair-value” moved noticeably higher last week. Reflecting lofty commodity prices, wider NZ-US interest rate spreads, and a surge in risk appetite on the back of the Fed’s extra stimulus, our model now implies a “fair-value” range in NZD/USD of 0.7750-0.7950.
Given positive momentum and negative USD sentiment, we wouldn’t be surprised to see the NZD/USD poke its head out of the top end of this range from time to time. Certainly, dips towards the bottom end should be viewed as buying opportunities.
For today, we’d expect support for NZD/USD on any dips towards Friday’s 0.7880 low, with little resistance ahead of 0.8050. Keep an eye out for the October’s QVNZ house price index, due around midday (NZT).
Majors
The USD strengthened against most of the major currencies on Friday. Nonetheless, the USD still ended the week down around 1% on a trade weighted basis, after the Fed pulled the trigger on quantitative easing mark II on Thursday morning and signalled more may be in prospect.
According to Friday’s non-farm payrolls report, US employers added 151k jobs in October, the fastest pace of hiring since April and well above market expectations of a 60k jobs gain. The data provided more evidence US economic data appears to be turning for the better, thus tempering speculation the Fed will be forced to ease monetary conditions further.
US bond yields ticked up 3-5bps in the wake of the data, throwing a lifeline to the USD. Indeed, USD/JPY climbed from 80.60 to almost 81.40 as US-JP 2-year bond spreads widened from 19bps to 22bps. US stock indices also recorded modest gains (the S&P500 rose 0.4%) despite a generally mixed lead from Europe equities.
The EUR was one of the night’s weakest performers. Not only did a stronger USD weigh on the EUR/USD, but sovereign debt pressures in the region continue to intensify. The spread between Irish and German 10-year bonds blew out to a record high of 550bps on widespread dissatisfaction with Friday’s Irish austerity budget.
From above 1.4200, EUR/USD slipped below 1.4050. Surprisingly weak German factory orders and Eurozone retail sales also provided a drag for the EUR. Looking ahead, this week’s events calendar looks positively subdued compared to last week’s wild ride.
It’s mostly a bunch of second tier data, interspersed with the usual smattering of Fed speakers. As such, we doubt we’ll see much in the way of firm direction for currency markets.
Certainly, USD sentiment is still negative and markets will continue to speculative on the chances of more stimulus from the Fed. But with US bond yields off their lows and USD positioning already overwhelmingly negative, we suspect we’ll just see the USD chop around inside a 75.60-78.00 range for most of the week. The G20 Summit in Seoul on Thursday and Friday will no doubt be in the headlines.
However, we doubt we’ll see any firm action from policy makers to address global imbalances or currency misalignments. China’s exchange rate policy will again be in the spotlight, but it’s worth noting the US has actually copped more criticism on this front of late following the Fed’s QEII policy.
Indeed, the German finance Minister said over the weekend "with all due respect, US policy is clueless."
* Mike Jones is part of the BNZ research team.
All its research is available here.
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