By Kymberley Martin
NZD
The NZD was the weakest performer amongst global peers on Friday, as global risk appetite eased. The NZD/USD ended the week close to its lows, at 0.8290.
On Friday, the ANZ commodity price index showed world prices for NZ primary produce were flat in February. This result was a bit better than the small drop we anticipated. The index of commodity prices in NZD is now 11% lower than a year ago.
The strengthening NZD – without the support of rising international prices – is quickly eroding returns and becoming a significant drag on the economy.
We suspect this is something the RBNZ will highlight in Thursday’s MPS, as it holds the OCR at 2.50%.
However, it was more a general waning in global risk appetite that weighed on the NZD on Friday. It fell steadily over the period to close at 0.8290. This is still within its zone of consolidation since the start of February.
We continue to see strong support at 0.8250 and resistance at 0.8420. A more hawkish-than-expected MPS from the RBNZ on Thursday could see the currency retest the upper end of this trading range.
The NZD/AUD cross will take its direction this week from the relative outcomes at respective central bank meetings. Our expectation is for both to potentially show a slightly less dovish leaning than is currently priced by the market. The NZD/AUD showed some choppy trading on Friday, but closed near its lows, just below 0.7730.
Today’s local data (net migration and building work put in place) are unlikely to impact the currency, so expect some consolidation today. Global sentiment this evening will be driven by the release of a slew of global PMI services indices.
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Majors
The USD was on the ascendancy on Friday, as the recent rally in “risky” assets ran out of stem. The USD strengthened against all its peers, with the USD index ending the week at 79.40.
On a day that was light on official data releases, “risky” assets took a breather on Friday. Equity markets in the Eurozone and the US failed to add to recent gains, closing down 0.10% and 0.30% respectively.
The market is nervous about the recent rise in global oil prices that appear to represent political risk as opposed to strong global growth conditions.
In addition, The Eurozone finance minister’s meeting delayed approval of half the €130b bailout fund for Greece, waiting for a more detailed assessment of the implementation of austerity measures.
In this backdrop, the “safe haven” USD found broad favour. The USD index rose steadily from 78.70 on Friday evening to end the week at 79.40.
By contrast, the EUR was on a steady downward path on Friday. Its cause was not helped by Spain announcing a weaker than previously agreed deficit target (5.8% of GDP compared to 4.4%). The EUR/USD declined from 1.3320 on Friday evening, to finish the week close to its lows, just below 1.3200.
The AUD/USD also subsided on Friday, ending the week at 1.0730. The RBA meets on Tuesday, and the market is pricing an 85% chance of rates being kept at 4.25%.
However, the market still prices a further 40bps of rate cuts in the year ahead, expectations we believe are too aggressive. An RBA “on hold” on Tuesday would likely boost the AUD short-term, given 15% chance of a cut is still currently priced.
In the week ahead, Thursday is a busy day for central bank meetings with the Bank of Canada, Bank of England and ECB announcing interest rates, along with the RBNZ.
This week also bring a slew of PMI services indicators to compliment last week’s PMI manufacturing equivalents.
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