by Mike Jones
NZD
The NZD has been the weakest performing G10 currency over the past 24 hours. Despite the updrafts from a broadly weaker USD, the NZD/USD spent the overnight session tracking sideways in a narrow 0.8170-0.8215 range.
Suggestions from Prime Minister Key that the currency is overvalued knocked some steam out of the NZD last night. Key said "We've been overvalued for a few days, but we're considering what we can do to resist a rising exchange rate".
The NZD/AUD skidded from 0.7935 to around 0.7900 in the wake of the comments, dragging the NZD/USD back to around 0.8220.
To us, the comments look to be nothing more than jawboning. We noted ourselves yesterday that the NZD/USD is indeed a tad ‘overvalued’ on a short-term ‘fair-value’ basis. But, equally, there is very little the government can do to lean against the strong NZD.
The high level of the currency is simply a reflection of the fact NZ economic growth is expected to outpace that of the UK, EU, US and Japan this year. This is something Key himself noted overnight.
Later in the night, a broadly weaker USD (see Majors) and solid real money and commercial demand for the NZD and AUD acted to steady the currency. The NZD/USD spent the rest of night chopping around either side of 0.8200.
Offshore trends in risk appetite will likely remain the key driver of the NZD this week. All eyes globally are back on Europe. So even if we see more robust US data, lingering Spanish concerns may keep risk appetite suppressed.
Technically speaking, a daily NZD/USD close below 0.8150 would pave the way for a test of key support at 0.8090 (the 200-day moving average).
There is no NZ data to watch out for today. Across the Tasman, keep an eye on the RBA minutes due out at 1:30pm (NZT).
Investors will scrutinising the minutes for additional hints a RBA rate cut is likely for May (as is our forecast and 92% priced by the market).
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Majors
It’s been a relatively directionless start to the week in currency markets, with positioning seemingly the major driver. The USD is a little weaker relative to most of the major currencies.
After a relatively lacklustre Asian session (Asian stocks fell 0.1-1.7%), investors’ mood improved as the night wore on. Strong looking US retail figures (0.8%m/m vs. 0.3% expected) helped offset a surprise decline in the April Empire manufacturing survey (6.56 vs. 18.00 expected).
There was also some marginally better news out of the Eurozone. Ratings agency Fitch patted Italy on the back for its latest austerity measures.
Meanwhile, reports the Spanish government would intervene to reign in overspending regions saw 10-year Spanish bond yields ease off their highs (although they remain above the critical 6% level regarded as unsustainable).
After opening in the red, stocks clawed back their losses to post modest gains. The VIX index (a proxy for risk aversion) eased from 20.50 to around 19.30. Against this backdrop, investors trimmed positions in the “safe-haven” USD. The GBP, EUR, and JPY all notched up gains of around 0.5% against the weaker USD.
Still, the moves look a little overstated given last night’s news flow. And we know investors have built up sizeable USD long positions of late. So part of these currency movements can be attributed to a classic ‘short squeeze’.
Looking ahead, market focus looks set to remain in Europe. Spanish debt auctions tonight and on Thursday will be closely watched. Any evidence of waning demand for Spanish debt would see a heavy toll taken on the EUR.
This week’s German ZEW (Tuesday) and IFO (Friday) data should be fairly solid. But, in an environment of risk aversion and widening sovereign credit spreads, this may not be enough to prop up the single-currency.
There is also plenty of data and events to watch in the US this week. Friday’s IMF meeting in Washington will likely see increased pressure on the Eurozone to increase the size of its firewall, but this is likely to be resisted for now.
On the data front, there is industrial production and some regional Fed manufacturing indices to keep an eye on. More evidence of building US economic momentum would support the USD, and add to the headwinds facing the EUR/USD.
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1 Comments
Empty talk as usual.
He has rulled out the Tobin tax. If they were serious, why not do as our much lauded trading partner China does. The Government controls the exchange rate by routing all international currency transactions through the government bank. Currencies are exchanged at it's chosen rates. Who can complain as it is just what China does and everybody accepts it? The currency stability and somewhat artificially low Yuan has worked wonders for China at the expense of the rest of the world, so why not us too. Of course it would put all Key's slithery non contributing currency trading mates out of buisness in a single move, so almost certainly he would far rather protect their doubtful interests over those of hard working New Zealanders.
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