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NZD/USD may push through post float high of 0.8214. Weak US data reinforces slowing concern.

NZD/USD may push through post float high of 0.8214. Weak US data reinforces slowing concern.

By Mike Jones and Kymberly Martin

In a spectacular rise, the NZD soared to three year highs last week, both against the USD and on a TWI basis.

Early in the week, a bolt higher in RBNZ cash rate expectations underpinned the NZD. Not only did Fonterra announce a humdinger of a 2011-12 payout forecast but 2-year ahead inflation expectations soared to 3%. In response, markets moved to price in around 60bps of RBNZ rate hikes over the year ahead, from below 50bps at the start of the week.

However, the real kicker for the currency came from reports on Thursday the CIC (China’s sovereign wealth fund) has earmarked 1.5% of its foreign currency reserves (roughly NZ$6b) to invest in NZ assets. While these reports are as yet unconfirmed, they are certainly consistent with the exceptional demand recorded at recent DMO government bond tenders.

From below 0.8000, the NZD/USD spent Thursday and Friday climbing to finish the week a smidge below 0.8200. At the same time steady buying from a mix of custodial and Asian real money accounts propelled the NZD/AUD to a three month high around 0.7650.

New Zealand’s economic schedule boots back up this week with Tuesday’s NBNZ business survey the crux of it. We expect this to register a further uplift in confidence and activity expectations remaining consistent with solid GDP growth. Elsewhere, today’s merchandise trade figures and Wednesday’s Overseas Trade Indexes should both reflect ongoing strength in NZ’s terms of trade. Later in the week the ANZ commodity price index and Fonterra’s milk price auction will provide timely updates on whether NZ export prices are sustaining recent gains.

Should this week’s local data fulfil our reasonably positive expectations, the NZD is likely to remain in favour amongst momentum and real money players. So a push through the NZD/USD post float high of 0.8214 looks likely, failing a deterioration in the global backdrop. In the short-term solid support is eyed towards 0.8100.

Majors

The USD weakened against all of the major currencies on Friday after more disappointing US economic data stoked fears about a slowing in US growth momentum. A bounce in the EUR/USD added to the pressure on the USD.

Not only did US pending home sales plunge 11.6%m/m in April (compared to the -1.0% expected) but personal spending figures also undershot expectations (0.4%m/m vs. 0.5% expected). A marginally better than expected read on consumer confidence provided a modest offset.

The EUR led the charge against the broadly weaker USD against a backdrop of easing tensions about a Greek sovereign default. Acting IMF chief Lipsky said the IMF does not anticipate a Greek sovereign debt restructuring.  In response European sovereign credit spreads narrowed and the EUR/USD jumped nearly 2c to above 1.4300.

Over the weekend a report in German newspaper Der Spiegel suggested IMF/EU inspectors will soon report Greece has missed all of the fiscal targets required to gain access to the next (€12b) tranche of IMF aid. The EUR/USD may return to the defensive early in the week as a result.

Ratings agency Fitch downgraded the outlook on Japan’s sovereign rating from stable to negative on Friday, citing rising government indebtedness. Market reaction was muted. USD/JPY briefly spiked up from 80.90 to 81.10, before heading lower again. Helping underpin the JPY on Friday, Japanese consumer prices turned positive in April for the first time since February 2009 (+0.6%y/y, from -0.1% in March).

Along with the continuing Greek debt dramas, expect plenty of market focus on the US this week. Flagging US growth momentum has spurred worries about how the US will cope with the end of the Fed’s QEII stimulus program, dragging US bond yields and the USD lower.

This week’s swathe of US data will help inform this debate. All eyes will be on the heavy hitting double act of Wednesday’s ISM manufacturing survey and Friday’s non-farm payrolls.

Fixed Interest Markets

There has been a marked flattening of the NZ curve in the past week, as short-end swap and bond yields have risen while long-end yields have inched lower.

Domestic and international forces appear to be pulling the NZ yield curve in opposite directions at present. NZ short-end yields have risen on domestic data that has generally been solid and last week’s upside surprise on RBNZ inflation expectations. Long-end yields continue to decline in line with US long yields. These have been dragged lower by weak US data and ever-present concerns regarding the European debt crisis. Consequently NZ yield curves have flattened.

On Friday in the NZ bond market this trend played out with 17s to 21s’ yields declining by 6-8bps while 13s’ yield rose by several basis points. At around 5.09% 21s’ yield is now at the lowest level since last October, soon after it bottomed at close to 5%.

Swap markets have also been driven by similar dynamics. Last week 10-year swap yields decline bay around 5bps while 2-year yields rose by around 7bps. 2s-10s now trade at around 178bps, down from around 190bps a week ago. The difference between the yield on 10-year swaps and bonds has inched further into positive territory at close to 7bps, its highest level since July 2010.

Relative to Australian short-end NZ swap rates have risen. NZ-AU 3-year swap spreads have moved to -1.43% from -1.53% a week ago.

In the week ahead the key NZ data release will be Tuesday’s NBNZ business survey, which we expect to show a continued uplift in confidence and activity expectations. This should maintain flattening pressure on the NZ yield curve, as domestic data incrementally boosts confidence in the NZ economic recovery, but the long-end of the curve remains weighed down by declining global long yields.

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See our interactive swap rates charts here and bond rate charts here.

Mike Jones and Kymberly Martin are part of the BNZ research team. 

All its research is available here.

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