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By Mike Jones

NZD/USD has drawn support from both home and abroad to reach a 5-week high of nearly 0.7100. In fact, the NZD has been the strongest performing currency over the past 24 hours.

Yesterday’s 5.7% increase in the Q4 terms of trade was the strongest since 1976. While clearly positive, this needs to be put in the context of a more than 15% cumulative fall over the preceding six quarters as the global financial crisis hit. Still, the data was very much consistent with the ongoing economic recovery we expect in NZ, and helped NZD/USD start the night of a firm footing.

Overnight, improving confidence about the global backdrop saw the NZD extend its gains.

Not only did Chinese trade data show Chinese exports going from strength to strength (rising 45.7%y/y in February), but comments from former EU Commission President Prodi reinforced expectations the Greek crisis is past the worst.

Reflecting the positive sentiment, the S&P500 posted its 5th consecutive gain and European equities also enjoyed modest gains.

As a result, investors shunned the ‘safe-haven’ appeal of the USD and JPY in favour of higher yielding currencies like AUD and NZD. NZD/USD was pitched from 0.7060 to nearly 0.7100, before a sharp slide in gold prices knocked NZD/USD from its highs.

We’re bracing for a wild ride in the NZD today. Undoubtedly, the main event will be the RBNZ’s Monetary Policy Statement at 9am. But the excitement doesn’t stop there, with Australian employment at 1:30pm and the February Chinese data ‘dump’ at 3:00pm (including retail sales, CPI, PPIs, and industrial production).

We expect the RBNZ will stay “on message”, affirming its mid-year focal point for starting to increase its OCR. While recent local data, and international events, argue for more of a delay, forward-looking indicators, and the May Budget, suggest there will be enough momentum to keep the Bank on its previously stated course.

We retain our long-held view of a first hike, in June, of 25bps. However, we’re mindful of the risk the bank delays tightening until July, or even September. Given market pricing is centred on a June 25bps hike, any such dovish undertones would provide clear headwinds for NZD/USD, and more so NZD/AUD. Near-term support for NZD/USD is seen towards 0.6950, and 0.7630 on NZD/AUD.

Majors
Similar themes prevailed in currency markets overnight. Commodity-related currencies extended their recent gains, while ‘safe-haven’ currencies like USD and JPY were sold across the board. Meanwhile, GBP continues to flounder.

Risk appetite was bolstered by further evidence the Chinese economy is going from strength to strength. Yesterday’s February trade balance dipped by less than expected, underpinned by a whopping 45.7%y/y gain in Chinese exports (38.3% expected). This only reinforces the case for stronger Yuan, something we expect from around mid-year.

Increased confidence about the global outlook was backed up by modest gains in global stocks. The S&P500 is currently up around 0.5% ¬– the 5th consecutive daily increase. European bourses posted gains of 0.7-1.0%. While US wholesale inventories data was a touch weaker than expected (falling 0.2%m/m in January compared to +0.2% expected), further signs of recovery in M&A activity spurred optimism about the US outlook. Talk from former European Commission President Prodi that Greece’s problems are “completely over” and contagion to the rest of Europe is unlikely also underpinned appetite for risk last night.

The VIX index (a proxy measure for global risk aversion) dropped as low as 17.5% at one point (the post crisis average is around 29.5%). Sliding risk aversion and optimism about the global backdrop saw investors bail out of ‘safe-haven’ positions in the USD and JPY, in favour of higher yielding currencies like EUR, AUD and NZD.

A heavy toll was taken on JPY in particular. USD/JPY rose above 90.70 for the first time since February. Speculation is rife that the Bank of Japan will further ease monetary policy next week, in an effort to stave intensifying deflationary pressures. Yesterday’s 3.7%m/m fall in January’s machine orders only served to highlight the dire Japanese outlook.

GBP also remains in the doldrums. Hot on the heels of yesterday’s woeful trade data, January’s manufacturing production showed a surprise fall (-0.9%m/m vs. 0.2% expected), and industrial production also disappointed (-0.4%m/m vs. 0.3% expected). Despite the softer USD, GBP/USD slipped from below 1.4900 from around 1.4980. Comments from Prime Minister Brown that the UK would likely retain its AAA rating provided some solace later in the night, and GBP/USD ground back towards 1.4950.

Sentiment towards GBP remains extremely negative. In fact, the speculative community hold the largest net short position in GBP on record (70,790 contracts), raising the risk of a bounce in coming days.

* Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here

By Roger J Kerr

The tight link between the NZD and AUD is slowly breaking down as we anticipated, and as reflected in the NZD/AUD cross-rate falling below previous lows to new 10-year lows of 0.7600.

However the AUD remains the largest single largest influence over the day-to-day NZD/USD movements.

One still has to be confident of the currency outlook that the NZD/USD rate will move lower over coming months as the USD strengthens to 1.3000 against the Euro. However, as I have stated several times over recent weeks, it also requires global commodity prices to be pulling back down to bring the AUD back below 0.9000 and lower.

The jury is still very much out on when and how commodity prices will behave this year after the dramatic spike higher in 2008, the big collapse and then the recovery upwards again last year.

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By Roger J Kerr

The trend down in the Kiwi dollar was never going to be a smooth and tidy one given the increased daily volatility that is now the norm in the foreign exchange markets.

The almost daily switching between “risk-on” and “risk-off” in global investment markets is jagging the Kiwi back up again from regular bouts of selling. Hedge funds, bank proprietary FX trading desks and other currency speculators continue to be attracted to buy and sell the AUD (and thus NZD) on these short-term market mood swings.

However, there has been no fresh development to change the medium term view that the NZ dollar is on a major downtrend against the USD that should take it to the mid to low 0.6000’s.

For the meantime, the NZD/USD rate is flicking up and down between 0.6800 and 0.7000 until there is the inevitable build-up in momentum to take it lower.

That downward momentum really has to come from the Australian dollar as all the other drivers of the Kiwi dollar still suggest lower levels (i.e. weaker EUR, the wide interest rate gap to the US and still poor economic performance).

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by Mike Jones

Sharply lower risk appetite and continued nervousness about the global recovery have taken a toll on the NZD over the past 24 hours. From levels close to 0.6950 this time yesterday, NZD/USD has slipped back to around 0.6890.

Yesterday’s February NBNZ business survey revealed businesses to be even more upbeat than at the end of last year, underpinning our story of strengthening GDP recovery this year. We had expected a slight further fall in net confidence. It actually increased to +50.1, from +38.5.

Still, economic fundamentals have mattered little in currency markets over the past 24 hours.

Instead, the NZD took its cues from a deterioration in risk appetite as concerns over European sovereign solvency returned to the fore. There were more warnings from ratings agencies overnight that a failure to stick to its austerity plan would see Greece suffer another sovereign downgrade.

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By Roger J Kerr

The lower NZD/AUD cross-rate to 0.7780 does confirm that the Kiwi currency is under-performing the AUD against the USD. However the economic and commodity price news has boosted the AUD once again in the global forex markets to above 0.9000 over recent days, and this in turn is keeping the NZD/USD at 0.7000 for the meantime.

Three conditions occurring together were always necessary for the Kiwi to make a concerted push below 0.7000 to 0.6800 and lower:-

1. A stronger USD against the EUR
This is now very much in train with the EUR weakening from $1.50 to $1.35 over recent months. The economic and investment market outlook in Europe has deteriorated with the Greek sovereign debt crisis highlighting the risks. The EUR/USD exchange rate is headed to $1.30 and $1.25 over coming weeks/months as investment flows and currency traders shy away from Europe.
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By Roger J Kerr

Forward pricing of 90-day interest rates and term swaps rates continues to decline in the marketplace as the realisation sinks in that the economic recovery this year will be slow and bumpy, allowing the RBNZ to take their time in respect to when they start lifting the OCR.

The RBNZ have the luxury of time to wait and observe the economic developments through the first half of 2010 because the NZD/USD exchange rate still remains relatively high (and monetary policy tighter because of this) and banks are paying mile above the OCR for retail deposits, thus actual market interest rates are much higher than the official OCR and BKBM rate settings.

Another good reason why the RBNZ are relaxed about the domestic economy and inflationary risks is that credit growth remains very subdued.

They were starting to be worried late last year when the housing market picked-up, however that has fallen away again and credit growth remains very low.

Given weaker employment, retail and housing data since the early December Monetary Policy Statement, the RBNZ have even more reasons to revert to their dovish tome of their October MPS on the economic forward look and reverse some of their more hawkish (and unnecessary) comments in the December MPS.

If the next Monetary Policy Statement on 11 March reverts to a more dovish tone as we expect, market interest rates could come off another 20 to 30 basis points.
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