by Mike Jones
NZD
It’s been a fairly eventful 24 hours in currency markets. The key theme to emerge from the overnight session is one of broad USD strength.
While the stronger USD has dragged the NZD/USD lower, the currency held up better than most thanks to a solid milk price auction.
The RBA left its cash rate unchanged at 4.25% yesterday, as expected. But the tone of the statement was much more dovish than anyone expected.
The RBA threw open the door to a May rate cut, noting growth is now “below trend” and it is “considering a further step to ease monetary policy”.
A May 25bps RBA cut remains our forecast, but a rise in the Australian CPI (due 24 April) of 0.8% or higher might prevent this. Our current forecast is 0.6%.
The more dovish RBA certainly knocked some of the wind out of the AUD’s sails, but heavy NZD/AUD demand saw the NZD/USD largely hold up. Indeed, the NZD/AUD hit 6-month highs around 0.7940 yesterday as interest rate differentials continue to move in favour of the NZD.
As noted in our recent strategy report, we expect the NZD/AUD to continue to trend higher this year as NZ-AU interest rate differentials become less negative. Near-term, our short-term valuation model suggests a 0.7750-0.7950 NZD/AUD “fair-value” range.
We were relieved to see a small bounce in milk prices at this morning’s fortnightly auction. We thought the 4.5% drop at the last auction was a little overdone. Today’s 1.5% bounce brings prices into line with the more gradual downtrend that remains our view.
Overnight, the NZD/USD felt the sting of a sharp strengthening in the USD. The release of the March FOMC minutes saw investors quickly price out the risk of further Fed easing (see Majors), lighting a rocket under US interest rates and the USD. From above 0.8230, the NZD/USD skidded back to around 0.8180, as rising US swap yields eroded some of the NZD’s yield advantage.
NZ-US 3-year swap differentials slipped from 253bps to around 245bps.
Today’s Australian February trade numbers will help determine whether last month’s weak figures were simply a timing issue related to Chinese Lunar New Year or the start of a more serious underlying trend decline.
Closer to home, the ANZ commodity price index (due 1pm NZT) is biased to record another small fall, in our view. Near-term support on NZD/USD is eyed around 0.8150, with resistance expected on bounces towards 0.8220.
------------------------------------------------------------------------------------------------------------------------------------------
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
------------------------------------------------------------------------------------------------------------------------------------------
Majors
The USD strengthened against all of the major currencies overnight. US bond yields and the USD received a clear shot in the arm from this morning’s FOMC minutes.
The minutes from the March FOMC meeting poured cold water on the idea the Fed is about to embark on additional monetary easing (so called QEIII). Yes, the FOMC remains concerned about the pace of improvement in the US labour market. And the fact there is plenty of slack in the US economy was duly noted by the Fed. But the real eye catching line for markets was "A couple of members indicated that the initiation of additional stimulus could become necessary if the economy lost momentum".
In other words, additional easing does not appear to be the Fed’s core view, and is only likely if the US economy weakens further from here. As we know, recent US economic indicators have actually been relatively positive.
In response, the USD soared across the board as markets priced out the risk of QEIII, underpinning US bond yields. 10-year US Treasury yields leapt 10bps to 2.26%, while 2-year yields ticked up 2bps to 0.35%.
Increasing yield support saw USD/JPY jump from 82.10 to almost 83.00. Meanwhile, EUR/USD lost over a cent to trade around 1.3230, and GBP/USD slipped from 1.5970 to closer to 1.5900.
Prior to the FOMC, the USD was already on the ascendancy thanks to rising ‘safe-haven’ demand. Global equity markets have spent the night in the red, and peripheral European bond spreads widened as worries about Spanish and Portuguese government finances returned to the fore. Stronger-than-expected data in the form of the UK construction PMI and Eurozone PPIs did little to improve investors’ mood.
For today, increasing yield support means we wouldn’t be surprised to see the USD extend its gains, particularly against low yielding currencies like the JPY and EUR. However, we’ll have to see more good US economic news for the USD rally to be sustained. So keep an eye on tonight’s ADP employment report and the ISM non-manufacturing index.
The release of Eurozone PMIs and retail sales, and the latest ECB policy announcement should ensure it’s another busy night in currency markets.
No chart with that title exists.
All its research is available here.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.