By Mike Burrowes
Last week, the NZD declined 1.80% relative to the USD. However, on Friday it continued to climb off its mid-week lows, finishing the week around 0.7620.
With no local data releases on Friday, the NZD crept higher during the day as global market sentiment stabilised. Overnight on Friday, European headlines knocked the major currencies around, although the NZD/USD managed to hold onto most of its gains. Touching above 0.7640 in the early hours, it closed around 0.7620.
The NZD/USD continues to trade a little above our fundamental “fair value” that sits in a 0.7100 to 0.7300 range. However, over the medium term we see the NZD being underpinned by the fundamentals of rising interest rates, solid commodity prices and accelerating GDP growth. A sharp deterioration in global risk appetite (likely centred on European developments) provides the most significant near-term downside risk.
The NZD/EUR made steady gains on Friday, trading up to 0.5840. Similarly the NZD traded higher relative to the GBP, closing the week at 0.4900.
On the cross, the NZD/AUD crept up from 0.7600 to end the week around 0.7630. The key drivers of the cross this week will be a slew of local data releases, and the release of the RBA minutes on Tuesday. Thursday’s Q3 GDP will be the local showpiece. We are looking for 0.8% expansion (2.4%y/y). Today’s NBNZ business survey should give us a guide for post Q3 growth. Today we also get the WMM consumer confidence survey and the NZ services PMI.
The past week has been notable for broad USD strength. It made most of its gains early in the week, being more range bound on Friday. On Friday, the NZD and AUD were amongst the strongest performers.
On Friday, the market continued to be buffeted by European headlines, and announcements on European sovereign ratings (see Fixed Interest). Our risk appetite index (scale 0-100%) stabilised around 40%. The Euro Stoxx gave up another 1.00%, but the S&P500 managed to hold onto a 0.30% rise.
The EUR experienced some volatility early Saturday morning. On the positive side, the recently appointed Italian PM, Monti, survived a confidence vote on his governments €30 package of austerity measures. More worryingly, rating agency, Fitch, placed a number of European nations on negative watch. The EUR/USD briefly touched 1.3080 before declining to close around1.3040.
The USD index by contrast, dipped below 80.00 in the early hours of Saturday morning. It then rebound to close above 80.20, a similar level to 24-hours earlier. The US CPI data attracted little attention. Core CPI rose 0.2%m/m or 2.2%y/y. This provides little reason for the Fed to worry, despite its highly accommodative policy, but does show inflation remains on a solid uptrend.
There were no Australian data releases to impact the AUD, but it drifted a little higher over the day on Friday. Despite the European volatility the AUD/USD held onto most of its gains on Friday night, to close the week around 0.9980.
In the week ahead, we get the German IFO survey on Tuesday, along with the release of the RBA minutes from their Dec 6 meeting. Wednesday brings the BoE minutes and Eurozone consumer confidence. Thursday is a heavy
Mike Burrowes is part of the BNZ research team.