By Mike Burrrowes
NZD/USD ended the week lower as the European debt crisis continues to weigh on currency markets. Indeed, a large fall in the US unemployment rate was largely ignored. NZD/USD spent most of Friday evening above 0.7800, before sliding to 0.7760 early Saturday morning.
Our NZD/USD “fair value” model has moved 2 cents higher of the past week to 0.7080 - 0.7280. The move higher in the “fair value” range was driven by the NZ-US 3 year interest rate differential moving from 1.95% to 2.26%; and a jump in our weekly risk appetite index from 32.2% to 39.7%.
With developments offshore dominating, the NZD/AUD cross has remained on the sidelines and continues to oscillate around 0.7600. However, expect some more volatility on the cross over the week with the RBA and RBNZ interest rate decision on Tuesday and Thursday respectively. We expect Thursday’s RBNZ Monetary Policy Statement to give some ground on account of global developments but hold the line on the 2.50% OCR and tightening bias for the medium term. It’s not as though the NZ economy is demonstrably faltering, indeed it looks remarkably resilient.
In terms of the data for the week, we expect Monday’s construction volumes to be up 1.0%, Wednesday’s Wholesale Trade Survey to imply a 1.2% gain in activity and Thursday’s manufacturing report to infer a 1.0% lift in that industry’s production. We have factored in a 1.2% fall in Friday’s electronic card transactions to account for November being a month of Rugby World Cup come-down. The other monthly reports of the week are October’s Crown Financial Statements, November’s QVNZ housing report and Fonterra’s latest dairy-product auction.
Looking to the day ahead, expect the NZD to take its cues from development offshore. Initial support on NZD/USD is eyed at 0.7640 and resistance at 0.7840.
Most of the major currencies ended lower against the USD on Friday. The moves lower were caused by rumours of a Spanish sovereign downgrade and cautionary comments from the IMF and ECB.
The moves in other classes were mixed, with the S&P500 index and Euro Stoxx 500 index ending flat and up 1.2% respectively. Our risk appetite index (scale 0 – 100%) eased back from 37.1% to 36.8%. The moves across commodity markets were mixed with the CRB index (broad index of global commodities) ending unchanged.
The USD index gained around 0.4% to 78.70 on Friday, helped by dampened risk sentiment. US non-farm payrolls for November were marginally weaker-than-expected (120k vs. 125k expected). However, the focus was on a fall in the unemployment rate to 8.6% and upwards revisions to employment for September and October.
Trading in EUR/USD remained volatile on Friday, rallying to an overnight high of 1.3550, before falling below 1.3400 early Saturday morning. The EUR was initially given a boost by rumours the ECB will lend the IMF €200bn to invest in Italy and Spain (read QE). However, the move higher in EUR was short lived as rumours circulated of a Spanish downgrade and talk about the US blocking IMF funding for Europe.
Over the weekend, the German Finance Minister Schaeuble spoke of a proposal for national redemption funds for “excess” sovereign debt. He hopes to present this to the EU leaders summit on Friday; the plan would call for individual Eurozone countries to set aside the part of their debt that exceeds 60% of GDP into a special fund that would be parked and repaid over 20 years. This plan looks to avoid giving any impression that responsibility is being pooled or indeed backed by Germany – which would be key to it receiving the support of Merkel and the German legislature.
The CAD struggled on Friday after employment data for November was weaker-than-expected (-18.6k vs. 20.0k expected). This saw USD/CAD rise from 1.0080 to 1.0190 currently.
The AUD/USD ended marginally lower over Friday at 1.0210 currently. The major focus this week in Australia will be the RBA interest rate decision on Tuesday. The market is currently fully priced for a 25bp cut and has a total of 135bps of cuts priced for the next 12 months. Our NAB colleagues expect the RBA to leave the cash rate at 4.50%, although a slim majority of analysts favour an easing to 4.25%. Following the RBA decision, we also have AU GDP for Q3 on Wednesday and unemployment rate for November on Thursday.
Looking to the week ahead, the focus is likely to remain on Europe. In particular, Merkel and Sarkozy are due to meet in Paris tonight; the ECB is widely expected to cut its policy rate by 25bps on Thursday evening and discuss its role in purchasing sovereign Europe debt; then on the 9thand 10th we have the EU leaders summit. Market expectations are for some real progress on how the EFSF will be expanded and agreement to push forward with fiscal integration. In the UK, the highlight will be the Bank of England rate decision. The BoE is widely expected to keep rates on hold, but there is a small chance they decide to increase their asset purchases.
Mike Burrowes is part of the BNZ research team.