by Mike Jones
NZD
While we’ve been gorging on chocolate and enjoying the surprisingly good weather, the NZD has spent the Easter break creeping higher. Since our last report on Thursday, the NZD/USD has climbed ¾ cent to around 0.8230.
Holiday-thinned trading conditions have spurred some fractious movements in currencies over the past few days. But looking through the volatility, a mild weakening in the USD has been the most eye-catching development.
Despite a fall in the US unemployment rate, Friday’s weaker-than-expected US employment report (see Majors) did nothing to assuage concerns global growth is losing steam. Risk appetite has suffered as a consequence.
Equity markets and commodity prices notched up modest losses as US markets reopened overnight. Our risk appetite index (scale 0-100%) now sits at 59.7%, from above 70% a fortnight ago.
However, sliding risk appetite didn’t result in a weaker NZD/USD thanks to the offset from a falling USD. Indeed, declines in US interest rates underpinned the NZD through a steady interest rate differential.
The NZ-US 3-year swap differential edged up from 245bps to 252bps, encouraging yield demand for the NZD.
On the home front, all eyes this week will be on Wednesday’s NZIER Quarterly Survey of Business Opinion (QSBO). The recent NBNZ business survey suggested that the NZ economy is about to take off. We are a little sceptical. Nonetheless, we do believe the economy is building up a head of steam and envisage an NZIER report that supports this.
Still, it will take a whopping great surprise from the QSBO to shake the NZD/USD out of its recent range. Since early March, the NZD/USD has been trapped in the 0.8090-0.8295 range, torn between the negatives of easing risk sentiment and weaker AUD, and the positives of building NZ economic momentum and widening interest rate differentials.
In the short-term, we suspect this tug of war will keep the NZD/USD relatively range-bound.
There are a few key offshore events to keep an eye on in the holiday shortened week. A speech from US Fed chairman Bernanke in a few hours might help shape USD sentiment for the week. And Friday’s slew of Chinese data will shed more light on whether the Chinese economy is in the midst of a manageable slowdown, or the much feared ‘hard landing’.
Any evidence of a quickened pace of slowing in the Chinese data would undermine the NZD/USD, but provide a further boost to the upward trending NZD/AUD.
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Majors
USD weakness has been the most noticeable theme in currency markets over the Easter break. The USD index has given up around 0.5% to trade around 79.70 currently.
Friday’s non-farm payrolls figures proved a bitter pill to swallow for those looking for further improvement in the US labour market. Sure, the unemployment rate fell from 8.3% to 8.2% (8.3% expected). But it was the disappointing 120k jobs added (205k expected) that captured markets’ attention. Speculation is now once again rife that further policy easing from the Fed could be on the way.
Most US markets were closed on Friday. As such, US markets spent most of last night catching-up to the weak payrolls report (European markets remain closed). US equity markets are down 0.7-0.9%, bond yields are sharply lower, and commodity prices are weaker.
The USD was initially caught between the positives of softer risk appetite, and the negatives of sliding yield support and speculation of QEIII. In the end, the negatives won out. USD/JPY tumbled from 82.50 to a smidge above 81.50, helping launch EUR/USD from 1.3050 to around 1.3120. The rest of the major currencies are all modestly higher relative to the USD.
Looking ahead, the US economy still looks to be improving on trend, which should prevent another bout of QE from the Fed. However, Friday’s weaker payrolls data means the strength of US data in the lead up to the June Fed meeting will be important in gauging prospects for the USD.
There is little US data out this week (Thursday’s Beige Book will be worth keeping an eye on), but a series of Fed speeches will be closely scrutinised for any comment on the US labour market. Chairman Bernanke speaks today at 11:15 (NZT). The US Q1 corporate earnings season also kicks off tonight.
Outside of the US, European sovereign debt concerns are likely to continue to percolate. Spain has been in focus of late, but this week brings a series of Italian bond auctions and Euro area industrial production (IP) figures.
Late in the week, focus is likely to shift to China. The weekend’s marginally stronger Chinese CPI figures prompted little market reaction (3.6%y/y vs. 3.4% expected). Friday’s IP, GDP and retail sales data are expected to display further evidence of a soft landing. A result along these lines would be positive for risk sentiment.
However, signs of a sharp slowing would weigh heavily on risk appetite and ‘growth sensitive’ currencies like the AUD, NZD and CAD.
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