By Mike Jones and Kymberly Martin
It’s been a choppy 24 hours for the NZD/USD, albeit within familiar ranges. Oscillating risk appetite, driven by uncertainty over the Greek debt crisis, spurred renewed volatility in currency markets. After sliding to around 0.7900 yesterday evening, the NZD/USD has rebounded to around 0.8000 this morning.
Still, the NZD finished the night near the top of the global currency performance rankings. It seems the currency continues to bathe in the afterglow of the recent spate of more positive NZ economic news.
In fact, on a trade-weighted basis, the NZD hit the highest level in almost 3-years. Until now the weak NZD/AUD has been holding back the TWI to some extent. But with the NZD/AUD having climbed some 2.9% in May to date, the TWI is now closing in on 70.00 for the first time since June 2008. Overnight, Australian commentator Terry McCrann said Europe’s debt crisis will adversely affect Australia, propelling NZD/AUD to 3-month highs above 0.7580.
So is the recent currency strength a threat to the NZ recovery? In this regard, it’s worth considering a broader indicator of financial conditions, given the NZD and interest rates are working in opposite directions in terms of their respective restraining/supporting effects on the economy.
A simple 2:1 monetary conditions index shows that conditions now are about as tight as prior to the devastating February 22nd Christchurch earthquake and subsequent 50bps RBNZ rate cut. In other words, the soaring TWI has more than offset the RBNZ’s attempt to ease financial conditions.
Moreover, assuming the currency does not fall out of bed in the short-term, there is little chance of the RBNZ’s (implied) monetary conditions forecasts from the March MPS being fulfilled. As such, tighter financial conditions are one obvious economic negative the Bank will have to balance against a series of positives as it puts together its forecasts for the June MPS.
Looking ahead, there is no key local data to watch for today. But keep an eye on a speech from RBA deputy governor Battelino across the Tasman. The NZD/USD continues to encounter headwinds on bounces towards 0.8020. A daily close above this level would bring a test of the recent 0.8120 high into focus.
Majors
It’s been a volatile 24 hours in currency markets with the major currencies putting in a generally mixed performance. Sentiment and risk appetite has generally waxed and waned in line with the twists and turns of the European sovereign debt crisis.
Through Asian and early London trading the USD strengthened relative to most of the majors as more negative Greek news knocked investors’ risk appetite. A Wall Street Journal article highlighted European divisions over how to deal with Greece and the OECD warned debt levels in Greece, Ireland and Portugal were unsustainable.
Asian equity markets suffered through another dour day, further pressuring investor confidence. The Shanghai composite index slipped 0.9% to be down over 10% from April’s highs. In response the EUR/USD skidded from 1.4100 to around 1.4020, dragging most of the majors lower in sympathy.
However risk appetite and the EUR/USD stabilised through the New York session, causing the USD to reverse most of its earlier gains.
Finland’s approval of participation in the Portuguese bailout, hawkish comments from ECB member Stark and an on-expectation Q1 UK GDP number (0.5%q/q) all likely contributed to the improvement in mood. Global stock markets recorded small gains and the VIX index (a proxy for risk aversion) dipped from 18.0 to around 17.2.
Not only did easing risk aversion weigh on the USD but Apirl durable goods orders data wasn’t particularly inspiring (-3.6%m/m vs. -2.5% expected) and US Treasury Secretary Geither said US unemployment will come down “too slowly for everybody”.
Against the retreating USD, the EUR/USD bounced back to around 1.4080. Meanwhile the GBP/USD surged from 1.6140 to almost 1.6280 reflecting widespread relief UK GDP figures weren’t any worse.
Fixed Interest Markets
NZ curves flattened as long-end yields inched lower while short-end yields moved a little higher.
The DMO announced its tender for the week with $100m each of 13s,17s and 19s. The tender offer is lower than in recent weeks. This is likely in response to the dip in demand seen at last week’s tender which itself may be a response to the recent rally in long bonds that has made yields less attractive.
Yesterday 17s to 21s yields fell by 2-4bp while 13s and 15s rose by 3-4bp resulting in some flattening in the curve. A similar dynamic was seen at play in the swap curve with 2s-10s flattening from 185bp to 181bp.
However, given the bump higher in short-end yields seen on Tuesday, post the high-side surprise on inflation expectations, the spread between NZ and Australian short-end swaps has become less negative. The NZ-AU 3-year swap spread has moved from -1.58% this time last week, to around -1.46%.
The downward pressure on US long yields will likely hold back any attempt by NZ long yields to rise today. The key local development will be the DMO auction where demand is expected to be solid rather than excessive.
No chart with that title exists.
See our interactive swap rates charts here and bond rate charts here.
Mike Jones and Kymberly Martin are part of the BNZ research team.
16 Comments
Good for gasoline micheal.....!! that is the crux of it.....An elite group exporters in the loop will trim their hedge when advised....but for the most part...yes... hammered into the ground.
The only thing Key has stopped short at saying is ..."We are Fonterra" sod the fern let's adopt a big uddered cow on the Black Jersy .
Isn't it great that Fletchers got the contract to demolish Grand Chancellor and a whole year to do it.........now that oughta keep the unemployment down a bit.
Comeon people.....the dairy farmers pick $8 plus the season, beef lamb at highs....all with a high dollar
Petrol going down .....high dollar again.
If we are doing so well with a supposedly high(in whose eyes) dollar .....
Why would we want it to go lower???
Who would benefit from that???
Me for one and I know of hundreds of others.........Go do some reading on what the NZMEA thinks of our artificially inflated dollar.
And yes I know the cost of gasoline within the wheels of the economy is of major importance...i already pointed that out only about a hundred times...and above again today.
Count - have a squizz at this:
http://www.johnwalley.co.nz/151-slip_sliding_away.aspx
Yeah, that overvalued and overly volatile dollar is so good for New Zealandshire - not.
Hence the comments by a small minority whose trading is advantaged by same - any comments Grant?
Cheers, Les.
Thanks for that Les.....I do drop in occassionaly for a read....and appreciate the vanguard efforts of the NZMEA.....unfortunatley Bolly is just bamboozled by the sheer demand from Billy Bob to Banky Boy.........he is either complicit in the long run or just in way over his headand out of his depth.......the latter would be my preferance......the one I could stomach anyway.
Chistov - the level of the NZD can never statisfy everyone participant in the FX markets, indeed every exporter within the export segment. The NZMEA will probably be the ones least happy but frankly if their exporters into Australia cant make money at 0.7500 they shouldn't be in business. If the NZD/USD was at 0.6500 - 0.7000 commodity prices would be astronomically high rather than just bloody good currently unless you own a vineyard) and putting a fire under another inflationary land boom.
NZ is enjoying its best terms of trade for donkeys years, and that can not be denied by anyone including the NZMEA, its a statistical fact.
It is currently a golden period for the exchange rate where the bulk of exporters are comfortable at the same time as most importers are as well - it won't last for ever, but its nice while its here.
Grant A. thank you for the input....for the most part thoughtful......shouldn't be in buisness is more than a little unfair in niche markets....
and the line Bulk of exporters...perhaps should read Exporters of bulk...that aside appreciate your thoughtson the matter.
Grant - could you respond to the questions I asked you here please:
At 02 May 11, 11:40am.
Thanks, Les.
Les
Apologies I did not see your reply and questions asked in that previous thread - I am directly involved in FX markets and there's no doubt that on ocassion, when timed right (the market is long and nervous), the RBNZ can influence markets in the short-term. However it is very short term, and if mis-timed, wasted and the NZ tax payer put at risk.
Therefore RBNZ intervention isn't an option in my opinion except on rare ocassions, certainly not enough to warrant much discussion as a technique in keeping the NZD at levels that some vested interest would prefer it (for every person that wants it lower, someone wants it there or higher).
However, if its not deemed appropriate to leave it to the markets then perhaps there are some arguments for using the likes of the Core Funding Ratios that John's article suggests - but I haven't seen specific suggestions in its use for that purpose, and by the way, I don't agree with his disappointment that the CFR doesn't fix a minium domestic deposit ratio because unless that follows some other dramatic Govt action to FORCE savings, NZers do not save enough to fund the banks sufficiently (unless its a low ratio he's proposing). If the banks stop lending entirely, exporters will have even greater problems.
I'm unsure how the MAS manages its bands and will do some further study in it, but its always dangerous to make sugegstions that their intervention does or doesn't work when you haven't looked at their whole economic and monetary system
Bearing in mind that NZ agricultural exporters are largely doing well, some extremely so, and manufacturing exporters into Australia mostly will have been as well, what percentage of the total exporting base is struggling ? It has to be low given our terms of trade currently - that said, I appreciate that things wo'nt always remains managable and that debate about how policy and processes can be improved is always good.
Grant - re you points about RB interevention, see my response to Stephen Hulme on that earlier thread I referred you to, my comment at 02 May 11, 11:25am. Regarding your point about Singapore, the arguement that we have to have a carbon copy economic and monetary system is invalid. The main learning points are, 1) it's possible to do things differently, especially in the case of a small open economy with a 'real' trade imperative, 2) which is facilitated by an ability to control non-tradeables inflation effectively - without the sole use of an OCR regime, 3) managing currency ex. rate in a band is assisted by not being dumb enough to disclose the band's location - if indeed it exists, in the strictest sence of a band, 4) which all up makes derivative trading of their currency less carry-valuable, less certain and therefore less attractive to specs. We don't have to turn Singapoeran to learn from them. Plus, the objection that we don't have the funds to fight specs is less valid as undervaluation is not our main problem - like, imagine how it'd be if RB was legislated to be less orthodox and going into an MPS was getting short and on the day dropped the OCR but cracked up the domestic fund ratio to stave inflation - would you be getting long thereafter, given that ratio and others would be used to quell inflation, as well as, if not more so, than the OCR regime?
Re. a domestics funds ratio, it would work against the moral hazard banks face with high proportions of foreign funds (better that NZD high and getting higher); helps NZ savers; reduces foreign debt, stops banks neutralising RB tightening policy by importing loose policy from elsewhere.
Re. trade into Auz, yep, even better if input costs are USD, however, while our exports there are approx. 20% with about 50% processed/elaborates, Auz is a reasonably mature market and with less room for expansion so it makes sense to look at expansion elsewhere and not just with our traditional primaries, given their natural limitaions, ref, Paul Callaghans recent speeches. While a few will be enjoying the break they are catching into Auz, markets elsewhere need to be developed and it's the investment intentions in this regard that "struggle" - because why would you when returns can be washed out in the turbulence created by derivative trade that sees NZ's "annual exports equate to about 12.5 hours’ worth of the currency trading and the annual total of imports and exports equate to the currency trading that takes place in a single day." ?????
See Bernard's article on the link below and drill through the link to John's blog again to a piece called, 'Slip Sliding Away':
Leaving things as is, leaves NZ going down the gurgler, who wants that?
Cheers, Les.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.