ECB’s inflation and growth forecasts slashed and in 'technical preparation' for negative rates

By Mike Jones


The NZD has been the strongest performing G10 currency over the past 24 hours. On a trade weighted basis, the currency is sitting at the highest level since August 2011, and is just 1% below the 75.19 post-float high.

Having tested top-of-the-range resistance at 0.8350, the NZD/USD has eased back to around 0.8320.

The NZD’s outperformance has been almost entirely driven by yesterday’s less-dovish-than-expected RBNZ Statement (although the robust Aussie jobs numbers also contributed).

A push higher in local interest rates in the wake of the decision has seen NZ-US 3-year swap differentials climb from 228bp to 238bps.

OIS markets now price just 10bps of rate cuts over the coming 12 months, having priced close to a full 25bps rate cut prior to the RBNZ decision yesterday.

We’ve revised up our NZD/USD forecasts for the second half of 2013. Previously, we expected the currency to gradually head lower through this period.

We now see less chance of this occurring and have lifted our end-2013 forecast from 0.7800 to 0.8100 accordingly.

This forecast revision reflects 1) the recent improvement in the global backdrop and above-trend forecasts for NZ’s trading partner growth, 2) our expectation NZ commodity prices will keep trending higher in 2013, and 3) the recent downgrade of US growth forecasts owing to the ‘fiscal cliff’.

The tone of this yesterday’s RBNZ Statement leaves us even more comfortable with our higher NZD view. If the Bank was ever going to shift to an easing bias, or at least flag the possibility of rate cuts in future, it was at yesterday’s meeting. The fact that they didn’t betrays a clear reluctance to cut rates.

Clearly, the RBNZ has faith in its forecasts for a pick-up in NZ growth and inflation next year. This less-dovish-than-expected view has already provided a boost to the NZD/USD, and we suspect more could be in store as the interest rate market prices more easing out of the curve.

It is also notable that the RBNZ made no attempt to jawbone the currency lower and in fact revised up substantially its forecasts for the NZ TWI. After consistently having a stronger currency view than the Bank for the past year or so, our forecasts are now more or less in alignment.

For today, we doubt this morning’s NZ wholesale trade figures will trouble the NZD. Whether the NZD/USD will re-test the 0.8350 overnight highs will largely depend on the relative strength of tonight’s US employment report (see Majors). However, a sharp decline in the EUR/USD early this morning may limit the NZD/USD topside on the day.


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A vicious sell-off in the EUR/USD has been the most notable feature of the overnight trading session. This has underpinned a late rally in the USD, reversing some earlier softness.

The Bank of England and ECB both kept policy unchanged overnight, as expected. But hints the ECB is considering rate cuts were enough to send the EUR/USD sliding from above 1.3050 to almost 1.2960.

Not only were the ECB’s inflation and growth forecasts lowered materially, but Draghi said there was "wide discussion" about whether to keep rates steady and the ECB is "technically prepared" for negative rates.

Heavy selling of EUR/USD and EUR crosses has seen European currencies more generally (DKK, CHF, SEK, NOK, and GBP) underperform.

Despite last night’s price action, an ECB rate cut looks far from a done deal to us. Despite the lower GDP forecasts, the ECB acknowledged for the first time the idea of growth reappearing “later in 2013”.

Draghi also noted the more optimistic turn in the PMI data and the German IFO rebound which, alongside last night’s surge in German factory orders, has given us more confidence the engine of the Euro zone economy is starting to base out behind the US and China. .

The question for us given our view of broader market stabilisation and a gradually weaker USD (particularly as we head into next week’s Fed meeting at which we expect Operation Twist to be replaced with between US$25-45b of outright UST purchases per month), is where does the EUR/USD base? For now, we expect support at the bottom of the short-term 1.2875-1.3135 range to hold.

It’s worth noting that, according to our model, momentum is still working against the USD. The model has flipped its previous long position in the DXY index into a short. The trailing stop on this position has been set at 80.76. The model has also exited its short EUR/USD position and is now long from 1.3014 (with the stop/loss set at 1.2854).

Tonight’s US non-farm payrolls data will help determine if negative USD momentum continues. The consensus forecast is for a weak-ish 86k jobs gain. Given the negative impact of Hurricane Sandy, investors may be tempted to look through a weaker number. But we suspect anything north of 90k would see the USD underperform as ‘risk’ positions are topped up.

Other News:

*Australian unemployment falls from 5.4% to 5.2% (below the 5.5% expected) thanks to a 18.1k increase in part time employment.

*German factory orders jump 3.9%m/m in October (1.0% expected).

*Second estimate of Q3 European GDP confirms technical recession. 0.1% fall was in line with the flash estimate.

Event Calendar:

7 December: NZ wholesale trade; NZ ANZ consumer confidence; EU ECB’s Draghi speaking; US non-farm payrolls

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I think with the Christchurch rebuild underway, and the Current good tone in the property market it is very difficult to cut rates at this time.  Its possible that the kiwi could peak at 0.88 - 0.90 cents on the US dollar over the next 6 months before the kiwi comes under pressure.  first I suspect we will see the Chinese doing some form of stimulus in the first part of 2013 which keeps thing trundling along nicely and the Aussie economy doing ok in the first half due to rate cuts.  Then the second half of 2013 Chinese economy will start to turn negative hitting Australian dollar and the Kiwi following suite.  There is still a lot of deleveraging that needs to happen.  The USA usually has a correction of some kind every 4-6 years so since the financial crisis in 2007 then we can expect some setback in 2013 (ie pretty close to recession again.  The Australians needs to stimulate other sectors of the economy to offset the mining slow down, and my guess by lowing rates this will stimulate the property market to rise nicely in 2013. Whether this will create more spending in the Australian economy will likely be minimal.  In NZ for the past year as exports have come under pressure due to the strong dollar, we have re-foccused attention to the property market.  This I suspect will be a continued theme for 2013.  In 2014 I am pretty sure the kiwi currency will be weaker against trading partners. This will please exporters but the exporters need to maintain market share as protectionism of industry will be more apparent particularly in the developed economies.  The big growth areas will be in South East Asia ie Laos, Cambodia, Myanmar, Indonesia, Malaysia, Vietnam, Thailand.

Don Brash reincarnated? He comes from global headquarters, with global orders  -  to get interest rates back up higher, get the NZ dollar higher  -  for the advantage of the corporates & global investors..... He knows full well that inflation is dead in the water  -  petrol prices are doing the job of the OCR  ...
Burn off all signs of green shoots .... get the economy (for the household) crushed into submission ...