NZ$ continues to rise against US$ on brighter global risk sentiment

by Mike Jones

NZD

The NZD spent most of last week drifting lazily sideways. In fact, if you squint your eyes through the volatility, the NZD/USD has spent the past 2½ months chopping sideways in a relatively tight 0.8080-0.8280 range.

Last week’s attempt from the RBNZ to talk the currency lower fell flat (again). The NZD/USD actually rose following the RBNZ’s Thursday OCR announcement, and continued to climb on Friday as global risk sentiment brightened. The currency finished the week up ¾ of a cent around 0.8225.

It’s worth noting, NZ dollar interest rate differentials tumbled last week, as interest rate markets priced out any chance of RBNZ tightening. From 242bps at the start of the week, NZ-US 3-year swap differentials fell back to 225bps. Normally, this would be a ‘fundamental’ negative for the currency. But, in our view, the RBNZ’s obsession with getting the currency lower means interest rates have switched from being a NZD driver to being NZD reactive. So falling rate differentials no longer matter for the NZD.

It’s data for Africa in NZ this week, starting with today’s NBNZ survey, building consents, trade balance, and credit data.

There are plenty more snippets of data to be released through the week. But, for the NZD, the two to watch are:

1) Fonterra’s latest milk price auction on Wednesday morning. Following the 9.9% price drop a fortnight ago, we’ll be looking for any signs of a corrective bounce. Another fall would surely take a toll on the highly ‘commodity-sensitive’ NZ dollar;

2) Thursday’s HLFS unemployment figures. We’re expecting a 0.2% increase in employment, keeping the jobless rate steady at 6.3%. The market expects 6.2% (compare this to the 24.4% Spanish jobless rate revealed on Friday).

The HLFS survey is notoriously volatile and can lead to violent NZD reactions.

For the NZD/AUD, the key release will be tomorrow’s RBA meeting (see Majors). As we noted last week, we think market pricing for RBA cuts over the coming 12 months looks overly dovish (110bps of easing priced compared to our expectations of around 50bps).

Given this, we think the NZD/AUD is biased to fall in the short-term. Longer-term, we expect the NZD/AUD to remain on a gradual uptrend, reaching 0.8400 by year-end.

All up, we think last week’s gains leave the NZD/USD a little overstretched and the currency is biased to fall this week. Pivotal support is eyed at the bottom of the well entrenched 0.8080-0.8280 range. Interim support at 0.8120 also looks solid.

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Majors

Familiar themes prevailed on Friday night. After a nervous start to the night, risk appetite eventually recovered on the back of the successful Italian bond auction (see Fixed Interest).

Equity markets lifted 0.2-1.1%, commodities rallied, and global bond yields inched higher.

Consistent with the improved risk sentiment, the ‘safe-haven’ appeal of the USD was shunned. A fairly uninspiring set of Q1 US GDP figures (2.2% annualised, vs. 2.5% expected) only added to the US dollar’s woes. As a result, all of the major currencies made further gains against the USD on Friday. The most notable of which was the GBP/USD, which now sits at its highest level since September 2011 (around 1.6260).

Currency volatility fell to extreme lows last week as most of the majors remained relatively range-bound. For this week, a busy calendar of data and central bank meetings means there is a good chance we finally see currency vol start to rise.

Australian markets are more than fully priced for a 25bps rate cut from the RBA tomorrow. In fact, current pricing is consistent with a 32% chance of a 50bps cut. A weekend article from Terry McCrann calling for a 50bps cut may solidify this pricing today.  Nonetheless, our NAB colleagues think a 25bps move is much more likely. Given this, we see scope for the AUD to rally on the day.

The ECB also meets this week. No change in rates will be considered but expect plenty of emphasis on growth, following Draghi’s recent suggestion the Euro zone should adopt a “growth compact”. Given the ECB’s focus on boosting growth, the door may be left open to further easing - a negative for the EUR.

Data-wise, this week is all about manufacturing. The official Chinese PMI will be released on Tuesday. A small increase to 53.6 is expected (from 53.1), following the recent improvement in the flash HSBC estimate.  A result on or above market expectations would support high-beta currencies like the AUD and NZD.

Manufacturing data in Europe, the UK and the US should make for slightly more concerning reading. A small fall is expected in the US ISM index and UK PMI, while euro area manufacturing activity is expected to remain in contractionary territory. A 165k jobs gain is expected from Friday’s US non-farm payrolls report. Spain will also remain in focus this week with sovereign bond auctions on Thursday.  

Overall, we suspect this week’s data may struggle to match investors’ solid global growth expectations. Should this pan out, higher yielding ‘growth-sensitive’ currencies (NZD, AUD, and CAD) would be expected to underperform their more ‘defensive’ peers (USD, JPY, GBP).

All its research is available here.