HYEFU shows weaker fiscal track for NZ economy in medium term and downgrading of GDP growth potential

By Kymberly Martin


The NZD/USD is a little lower this morning, at 0.8420.

Yesterday’s release of the Half Yearly Economic and Fiscal Update failed to materially surprise the market. It showed a slightly weaker fiscal track over the medium-term as the Treasury downgraded its view of GDP growth potential.

Overnight, despite a positive environment for risk appetite generally, the ‘risk sensitive’ NZD failed to push onto new heights. After its recent surge higher the NZD/USD appears to be consolidating above the 0.8400 level, which is now a key support level.

Early this morning the GDT diary auction showed a continuation of the plateauing in prices seen in recent months. Average dairy product prices rose 1.1% from the previous auction. This is consistent with our view of supportive NZ commodity prices continuing to underpin the NZD in the year ahead.

The NZD was on a steady descent overnight relative to its well-supported European peers. The NZD/EUR slipped to sit below 0.6370 early this morning.

A key determinant of sentiment toward this cross this evening will be the release of the German IFO survey (see Majors).

Elsewhere, broad market sentiment will likely be driven by headlines seeping out from the US fiscal cliff negotiations as the January 1 deadline looms.

Tomorrow’s key test for the NZD will be the release of Q3 GDP and the ANZ business confidence survey.


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The USD was weaker in the backdrop of robust risk appetite overnight. European currencies were the key beneficiaries.

The market appears buoyed by pre-Christmas cheer. Markets were boosted by signs a negotiated solution to the US fiscal cliff dilemma may be within reach.

The latest compromise appears to be from President Obama who is lowering his new tax target by $200b. His offer proposes setting the threshold for increased income tax at $400,000 rather than $250,000.

Equity market in the US and Europe made solid gains. Our risk appetite index (scale 0-100%) has moved back up toward recent highs, at 77%.

In this backdrop the ‘safe haven’ USD slipped from favour. The USD index has fallen back to two month lows around 79.30.

The EUR was a key beneficiary. The market also took positively Spain’s ability to sell its maximum target of bills in its last auction for the year.

Private investors also agreed to purchase 55% of the capital of Spain’s bad banks, allowing the government to keep the debt off its books. This appeared to override the fact that bad loans as a total of Spanish bank lending was recorded rising to 11.2% in October, from 10.7% the previous month.

The EUR/USD climbed to 1.3230, its highest level since early May.

The JPY fell a little further relative to the USD. The USD/JPY, at 84.10 is now at the highest level since April 2011. The next test for the JPY will be the BoJ policy decision on tomorrow.

The AUD underperformed along with the CAD and the NZD over the past 24-hours. Yesterday’s RBA minutes suggested it was the weaker labour market conditions that spurred the RBA to cut rates in December.

A weak investment outlook and the high AUD were also emphasized. The minutes supported the market’s expectations for further easing.

Our NAB colleagues expect at least one further 25bps cut. The market prices a 60% chance of this occurring at the February meeting, though our NAB colleagues suspect the RBA may pause at that meeting.

The AUD /USD sits a little lower at 1.0530 this morning.

Tonight, the German IFO survey will be released, as the latest key indicator of the state of ‘core’ Europe. Consensus expects key elements to hold at current levels of improve slightly.

The Bank of England minutes will also be released. US housing data will also be available, though broad risk sentiment will likely hinge on headlines emanating from the US fiscal cliff negotiations.

Event Calendar:

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.

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