New government in Japan and already LDP leader Abe repeating calls for “bold” BoJ easing and a higher inflation target

By Mike Jones


The NZD/USD finally overcame the 0.8360 glass ceiling last week. A bout of USD bashing following the Federal Reserve’s latest easing effort and steady NZD/AUD buying helped propel the NZD/USD to 15-month highs above 0.8470.

A march higher in the NZD/JPY added fuel to last week’s NZD rally. And with the LDP party gaining an outright majority in the weekend’s Japanese elections (see Majors), further NZD/JPY gains appear to be in store.

Our forecasts are consistent with an appreciation into the mid-70s by mid next year (NZD/JPY currently 71.20). But with negative JPY momentum firmly entrenched, the move could come earlier.

In addition to the above, it appears the NZD is again benefitting from seasonal demand in the silly season. Indeed, we’ve found December to be a statistically significant, seasonally positive month for the NZD/USD.

The NZD/USD has rallied in 9 of the last 12 December months with the average monthly increase since 2000 being 2.3%. In December 2012 to date, the NZD/USD is up 3.1%.

With seasonal factors working alongside positive momentum, rising commodity prices, and a relatively hawkish central bank, we could see the NZD/USD break into the 0.8500s this week. However, there is plenty of local event risk for the currency to negotiate.

Most notable is this regard is Thursday’s NZ GDP report. BNZ economists are looking for a respectable 0.5%q/q (2.6%y/y) expansion. The market consensus is 0.4%, with the dispersion of forecasts evenly distributed.

Given the increasingly stretched net long positioning of the speculative community, the NZD/USD is probably most sensitive to any downside surprises.

Elsewhere, Tuesday’s ANZ business survey will provide a more timely reading on the NZ economy. We expect the survey remain consistent with annual GDP growth in the order of 2.5-3.0%.

Wednesday’s current account figures should show a pause in widening trend at 4.9% of GDP, and the Government’s Half-Yearly Update (Tuesday) is likely to portray a less rosy economic outlook.

Lastly, Wednesday morning’s GDT dairy auction is expected to show prices stabilising after their earlier steep run-up.

Overall, we look for NZD/USD support at 0.8360 to hold this week, with a climb into the 0.8500s likely as long as the local data plays ball. Initial headwinds are expected towards Friday night’s 0.8475 high.


To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.




The USD finished last week on the back-foot.A slide in US bond yields looks to have done the damage. The 10-year Treasury yield slipped around 5bps to 1.7% on Friday as a 0.3%m/m fall in the November US CPI (1.8%y/y, -0.2% expected) reinforced the Fed’s latest pledge to maintain accommodative policy.

The EUR led the gains against the broadly weaker USD, with a squaring of speculative EUR shorts adding to the upward momentum.

The EUR/USD finished the night nearly 1 cent higher around 1.3160. As noted last week, we expect the single-currency to see out the year in the 1.3000-1.3200 range, although a positive resolution to the fiscal cliff could provide the fuel for a probe above 1.3200. 

The key news over the weekend is the two-thirds supermajority won by the LDP party in the Japanese elections (together with its coalition partner New Komeito). This allows the LDP to drive legislation through parliament even if the upper house rejects it.

LDP leader Abe has already repeated his calls for “bold” BoJ easing and a higher inflation target. USD/JPY has opened the week some 75 points higher around 84.30 as a result.

The next test for the JPY will be the BoJ policy decision on Thursday. We suspect Friday’s lacklustre Tankan data has all but cemented further easing.

We look for a ¥5-10t increase in the BoJ’s asset purchase programme –another token gesture that is unlikely to move the JPY. The Riksbank (Sweden) and Norges Bank (Norway) also meet this week. A 25bps cut and no change are expected, respectively.

The US fiscal cliff may (finally) start to matter for investors this week, particularly since it is a quiet data week and the deadline for negotiations is getting perilously close. Notably, Republican House Speaker Boehner over the weekend offered to raise taxes on high income earners, in exchange for entitlement cuts.

While Obama rejected the proposal, it is perhaps a sign of progress. Until now, the Republicans have refused to budge on tax hikes for the rich. Indications a deal could be reached by year would be positive for risk appetite and ‘pro-risk’ currencies. In contrast, the ‘safe-haven’ USD and JPY would find support if the US economy briefly tipped over the cliff.

Other News:

* French and German ‘flash’ manufacturing PMIs undershoot expectations, delivering an underwhelming 46.3 in the European composite PMI (46.6 expected).

Event Calendar:

17 December: NZ consumer confidence; NZ PSI; AU RBA’s Debelle speaking; UK house prices; US empire manufacturing;

18 December: NZ ANZ business confidence; AU RBA Board minutes; CH property prices; US NAHB housing index

19 December: NZ current account; EU German IFO; UK BoE minutes; US housing starts & building permits;

20 December: NZ GDP; AU RBA Bulletin; JN BoJ decision; UK retail sales; US jobless claims; US Philly Fed; US home sales;

21 December: NZ net migration; NZ credit card spending; UK public finances; US durable goods orders; US Chicago Fed index.

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a 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.