Despite recent falls, NZD still 10 percent above fair value

By Kymberley Martin

NZD

The NZD/USD moved gradually off its previous days lows, as risk appetite stabilised over the past 24-hours. It got a boost higher early this morning, on news of steps forward in the Greek debt swap deal. The NZD/USD currently trades around 0.8190.

However, the falls in the NZD/USD in recent days are a reminder of how vulnerable the NZD is to shifts in sentiment in a highly jittery market. This is particularly so, as the NZD/USD continues to trade some way above our fundamental short-term “fair value”. It sits around 0.7450-0.7750.

The NZD made steady progress against both of its key European peers overnight. The NZD/EUR traded up from around 0.6200 yesterday afternoon, to 0.6230 currently. Versus the GBP the NZD traded from 0.5170 to 0.5200.

The NZD/AUD surged higher yesterday afternoon, following the weaker-than-expected release of AU Q4 GDP (see Majors). It shot from 0.7700 to 0.7730, drifting up overnight to trade just below 0.7750 currently.

There is plenty of event risk for the cross today with the 9.00 (NZT) RBNZ meeting and the 1.30pm (NZT) AU employment data release. We expect the RBNZ to remain on hold, and likely push back its implied starting point of its rate hiking cycle. However the market is already pricing very little from the RBNZ (25bps) in the year ahead.

Therefore, the accompanying MPS still has the potential to be less dovish than the market is currently expecting. The MPS will likely also make reference to the recent strength in the NZD, which is someway above the RBNZ’s central forecast.

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Majors

The USD gave back a little of its gains over the past 24-hours. In contrast to the previous day’s moves, the NZD was the strongest performer and the JPY the weakest.

Overnight, the USD was quite range-bound early in the evening, but appeared to build some upward momentum after the release of the February US ADP employment report (216K vs. 215K expected). This reduces the risk of a negative surprise in the all-important non-farm payrolls release tomorrow. The USD index touched above 79.90 early this morning, before headlines outlining developments in the Greek debt swap deal (see Fixed Interest). The USD index then dropped to 79.70.

Conversely, the EUR/USD showed choppy trading, dipping as low as 1.3100 early this morning. It was under pressure after the release of January German factory orders (-2.7%m/m (sa) vs. 0.6% expected). These raise concerns about the immunity of European’s industrial core to the financial shenanigans. Later, the EUR received a boost from the Greek news, moving up to trade around 1.3140 currently.

In this backdrop, markets recovered a little from their previous day’s jitters. Our risk appetite index (scale 1-100%) moved from 52%-56%, and equity markets recorded modest gains (around 0.70%). 

The JPY lost some of its lustre as a “safe haven” yesterday as market sentiment stabilised. The USD/JPY tested support at 80.60 a couple of times yesterday before trading up to around 81.00 currently.

Yesterday afternoon, the AUD gapped lower after a softer-than-expected Q4 GDP release (0.4%q/q vs. 0.8% expected). Q4 growth had slipped to 2.3%y/y from 2.6% previously. Domestic demand was very weak, up just 0.2% in the quarter. The GDP report paints a much softer picture of the economy at the end of last year than we, or the RBA, were expecting (the RBA’s forecasts had 2.75%y/y) and means 2012 GDP forecasts will be revised lower. All up, it would have to slightly increase the chances of another RBNZ rate cut. The market continues to price a further 40bps of cuts from the RBNZ. On the release, the AUD/USD dropped from above 1.0570 to 1.0510, before clawing its way back up to 1.0570 overnight.

Today’s key release for the AUD will be the 1.30pm (NZT) release of AU employment data. This evening the ECB and the BoE and the Bank of Canada announce interest rates.     

All its research is available here.