By Mike Jones
NZD
It’s been a volatile start to the week for the NZD. After spending most of the past 24 hours dribbling lower, the NZD/USD lurched almost a cent higher early this morning. The currency currently trades around 0.8410, close to the top of its recent 0.8250-0.8430 range.
The fortunes of the NZD remain closely tied to gyrations in global growth sentiment and risk appetite. Indicative of such, the correlation between the NZD/USD and the US S&P500 is currently 96%.
Doubts about the strength of the global economy dominated the early part of the overnight session. Risk aversion moved higher and global equity markets slipped into the red.
Reflecting the more dour sentiment, investors trimmed positions in “risk-sensitive” currencies like the NZD and AUD in favour of the USD and JPY.
However, it wasn’t long before the NZD was back in favour. Modest declines in oil prices and German approval of Greece’s second bailout package saw global growth concerns put on the backburner. As risk appetite recovered, the NZD/USD was launched from 0.8340 to nearly 0.8420.
Yesterday’s solid-looking January merchandise trade figures may have helped underpin the NZD over the past 24 hours. Yes, a surprise NZ$199 trade deficit was recorded.
But the figures also showed both imports and exports expanding at a good clip. Exports rose by 13.0% in the year to January, while underlying imports (excluding aircraft) rose by 12.8% over the same period. Certainly strong enough to suggest the economy is ticking along.
Stepping back from the near-term noise, the NZD/USD has spent February essentially chopping sideways in a 0.8250-0.8430 range. The currency is now creeping towards the top-end of this range. Undoubtedly, short-term “fundamentals” suggest the NZD/USD should be lower. However, solid global risk appetite and a weak USD are keeping the currency elevated.
Given this, we’ll need to see more fuel for the risk rally if we are to see the NZD/USD break convincingly above 0.8430. Wednesday’s ECB long-term refinancing operation (LTRO) certainly has the potential to stoke the NZD rally should European banks load up on cheap ECB cash (market expectations are for a take up of between €400 bln and €1 tln). A daily NZD/USD close above 0.8425 would establish a new uptrend.
Majors
It’s been a topsy-turvy sort of night in currency markets. The USD has finished up marginally firmer relative to most of the major currencies.
Early in the night, surging oil prices knocked some of the steam out of risk appetite. With prices flirting with US$110/barrel for the first time since May 2011, investors began to fret about the likely impact on global growth. Some negative comments on Greece from ratings agency Moody’s and a German minister didn’t help the mood.
European equity markets slipped 0.3-0.7%, US stocks opened lower, and the VIX index (a proxy for risk aversion) jumped from 17.5 to over 19.0. Consistent with this “risk-off” mood, “safe-haven” currencies like the USD and JPY strengthened. USD/JPY gave up some of its recent gains and EUR/USD skidded from 1.3460 to below 1.3380.
However, moving into the New York session, sentiment began to improve. US economic data continued its encouraging tone (pending home sales and the Dallas Fed manufacturing index both printed above expectations), bolstering global growth sentiment. Crude oil prices also eased off their earlier highs (to around US$108/barrel) and the German parliamentary vote to approve the second Greek was passed.
US stock indices moved from the red into the black (the S&P500 is currently up 0.3%), risk aversion eased and “risk-sensitive” currencies bounced. EUR/USD rose ½ cent to 1.3420, the AUD/USD soared almost a cent to 1.0775, and the JPY gave up some of its earlier gains.
Looking ahead, if upcoming global data (most notably global PMIs, the US ISM survey and US non-farm payrolls) continues to bolster confidence in the global economy, the “safe-haven” USD will remain on the back-foot. Risk-sensitive assets will remain in demand.
Still, market’s immediate focus is Wednesday’s ECB LTRO. Market expectations are for anywhere from €400 bln to €1 tln of funding to be requested by banks at the LTRO (€489 bln was allotted in December). We suspect a take-up towards, or above, the upper-end of expectations will be needed to sustain the recent risk rally.
Support on the USD index is eyed towards December’s 77.90 low. Headwinds are expected to be encountered on any bounces to 78.80.
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