By Mike Jones
NZD
Negative news on both the domestic and global economies spelled double-trouble for the NZD/USD last week. The currency shed just under a cent through the week, to finish around 0.8170.
Investors’ risk appetite lost some of its heat last week, as global growth worries returned. After starting the week at 71%, our risk appetite index (scale of 0-100%) eased back to around 69%.
Clearer signs of an economic slowdown in China and stubbornly high oil prices both acted to erode confidence in the global backdrop. As a result, ‘risk-sensitive’ currencies like the NZD lost some of their allure.
Domestically, the news wasn’t much better. Last week’s disappointing NZ GDP growth figures and milk price slide simply added to the weight on the currency.
We suspect speculative accounts have been behind much of the recent NZD/USD selling. We have previously highlighted the fact NZD net long positions were built up to “extreme” levels around mid-February.
The latest IMM data show net longs have been slashed by 82% in the four weeks since 21 February.
We’ve been expecting a near-term NZD/USD pull-back for a while. In the short-term, we wouldn’t be surprised to see the pull-back extend. The NZD/USD still looks a little overstretched relative to short-term fundamentals. In particular, NZ commodity prices continue to trend lower, portending less ‘fundamental’ support for the highly ‘commodity-sensitive’ NZD.
The CBA New Zealand commodity price index is down around 5% from last year’s peak. And recent anecdote of softening Chinese demand and increasing (dairy and lamb) supply raises the risk NZ commodity prices will continue to ratchet lower in future.
Slotting less commodity price support into the mix of a less favourable global backdrop and negative momentum suggests we could see the NZD/USD break through support at the 200 day moving average around 0.8090 before long. From there, the 0.8000 level stands out as the next key support level.
Thursday’s NBNZ business survey will be the focal point of NZ’s calendar this week. Having been highly resilient over recent months we expect this March edition to begin to show the impacts of the recent surge in the currency and moderation in export prices. In the meantime, today’s merchandise trade figures for February might well give the impression of weakness. We’re expecting a -$11m deficit, compared to market expectations of a $153m surplus.
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Majors
Currency markets saw out the end of last week in sleepy fashion. A dearth of news kept most of the major currencies fairly range-bound on Friday night.
Still, a modest weakening in the USD provided a boost to the major currencies. Rumours China would cut banks’ reserve requirements over the weekend (which have subsequently been disproved) saw investors become a little less risk averse.
US stocks posted small gains (the S&P500 rose 0.3%) and the VIX index (a proxy for risk aversion) slipped from 16% to below 15%.
But it wasn’t just falling ‘safe-haven’ demand that undermined the USD. February US new home sales fell short of expectations (313k vs. 325k expected) and US Treasury yields continued to ease of last week’s highs. From last week’s ‘peak’ around 2.4%, 10-year Treasury yields now trade closer to 2.2%.
Against the broadly softer USD, the EUR climbed from 1.3200 to around 1.3280, the GBP/USD ground up ½ cent to 1.5970, and USD/JPY briefly slipped to a 10-day low close to 82.00.
Last week was dominated by worries about slowing growth in China and general risk aversion.
For this week, market focus is likely to shift back to Europe. There will be plenty of attention on European data, particularly after last week’s Flash PMIs for March hinted at a sharp slowing in growth momentum.
Highlights will be tonight’s German IFO, Thursday’s unemployment figures, and Friday’s retail sales. In the UK, the final estimate of Q4 GDP on Wednesday will be the main event.
European debt market sentiment will also tested with Spanish bond auctions on Tuesday and Italian bond auctions on Tuesday, Wednesday and Thursday. Spanish and Italian sovereign spreads have been grinding up lately, suggesting debt market concerns remain. Last but not least, there is a Eurogroup/EcoFin meeting in Brussels on Friday. Investors will be looking out for an increase to the EFSF/ESM ceiling.
Given all the event risk, it could be a volatile ride in the EUR this week. And with the US and Chinese data calendars looking comparatively light (although we will get more Fed speak), gyrations in the EUR may well dictate broader currency market sentiment this week.
We still think the EUR is susceptible to a move lower given weak economic fundamentals. Any signs of debt market stress this week could trigger a move back to 1.3000. In the short-term, expect resistance on bounces towards 1.3300.
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