By Mike Jones
NZD
The NZD/USD has made a perky start to the week, thanks to the updrafts from a broadly weaker USD. After spending most of the night in a tight 0.8140-0.8180 range, a sharp sell-off in the USD propelled the NZD/USD above 0.8200 early this morning.
Providing stiff headwinds for the USD was another dovish epistle from Federal Reserve chairman Bernanke.
Hints from Bernanke that yet more stimulus may be required to get US unemployment down buoyed investor hopes of quantitative easing mark III. Stock markets soared, and the USD was sold aggressively.
The AUD/USD and EUR/USD both leapt around a cent, and the NZD/USD was dragged up from around 0.8170 to almost 0.8230.
Small falls in US interest rates saw NZ-US interest rate differentials widen, helping underpin the NZD. NZ-US 3-year swap differentials now sit at 255bps, from 250bps at the end of last week.
A positive and widening NZ-US interest rate differential is a key facet in our view the NZD/USD will remain on a gradual uptrend this year.
Back of the envelope analysis suggests that, for our year-end NZD/USD forecast of 0.8500 to be realised, we’d have to see NZ-US 3-year swap differentials head up to around 300bps. This is entirely plausible if we see the RBNZ begin to raise rates from year-end, and Fed policy remain accommodative, as we expect.
For today, there is little on the data calendar to trouble the NZD/USD. As a result, the familiar 0.8145-0.8265 range should contain the currency in the lead up to this week’s more interesting events (Thursday’s NBNZ confidence survey, European bond auctions on Wednesday and Thursday, and Friday’s Eurogroup meeting).
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Majors
The USD weakened against most of the major currencies overnight, thanks to a mix of firmer risk appetite and dovish Fed-speak.
The USD actually started the night on the front-foot. The German IFO looked solid enough - March’s 109.8 print (109.6 expected) was the fifth straight monthly improvement. But comments from IFO economists that the German economy is losing momentum took some of the gloss off.
The EUR/USD slipped from 1.3280 to 1.3180, paving the way for a broad USD strengthening. USD/JPY ground up from below 82.50 to around 82.80.
Later in the night, Fed Chairman Bernanke stepped back into the limelight. Bernanke’s dovish tendencies again shone through. He signaled that, despite encouraging signs, the Fed may yet need to provide more easing to stimulate growth and reduce unemployment. Equity markets and commodities rallied aggressively on hopes for more easing.
The S&P500 is currently up around 1.1% and the CRB index (a broad index of commodity prices) is up 0.2%.
In currency markets, the USD was slammed, launching most of the majors higher. EUR/USD bounced over a cent to 1.3320, GBP/USD soared nearly 1½ cents higher to 1.5940, and AUD/USD finished the night up 0.5% at around 1.0520.
Last night’s US data didn’t do the USD any favors either. February pending home sales (-0.5% vs. 1.0% expected) continued the run of softer US housing data and the Chicago Fed (manufacturing) index was similarly uninspiring (-0.09 vs. 0.00 expected).
Looking ahead, there are a few more snippets of Fed speak to watch for this week. However, we suspect the market’s focus is likely to gradually shift to Europe.
In particular, European debt market sentiment will be tested with Spanish bond auctions on Tuesday and Italian bond auctions on Tuesday, Wednesday and Thursday. Italian and Spanish sovereign spreads have been grinding up lately, suggesting debt market concerns remain.
There is a Eurogroup/EcoFin meeting in Brussels on Friday. Investors will be looking out for an increase to the EFSF/ESM ceiling (the bailout fund).
Given all the event risk, it could be a volatile ride in the EUR this week. We still think the EUR/USD is susceptible to a move lower given weak economic fundamentals. Any signs of debt market stress this week could provide the catalyst for a move back to 1.3000.
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1 Comments
Japan is on an unsustainable path of a strong yen and deflation. The unprofitability of Japan's major exporters and emerging trade deficits suggest that the end of this path is in sight. The transition from a strong to weak yen will likely be abrupt, involving a sudden and big devaluation of 30 to 40 percent. It will be a big shock to Japan's neighbors and its distant competitors like Germany. The yen's devaluation in 1996 was a main factor in triggering the Asian Financial Crisis. Japan's neighbors must have a strong banking system to withstand a bigger devaluation of the yen. Read More
Are New Zealand's fundamentals any different?
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