By Mike Jones
NZD
There’s been the usual liquidity-starved, volatile trading in the NZD/USD through the holiday period – one month vols have climbed from 7% to almost 8.5%.
However, the currency is little changed on net.
Despite some big swings over the past fortnight, at around 0.8320, the NZD/USD is pretty close to where it was at the time of our last report on 21 December. A vicious liquidation of speculative long positions weighed on the NZD through the latter stages of 2012.
Having been run up to ‘extreme’ levels, net NZD longs held by the speculative community were slashed by 67% (to 14.7k) in the week leading up to Christmas.
This, along with year-end fiscal cliff jitters, helped take the NZD/USD from above 0.8300 to almost 0.8150. However, investors’ relief over a stop-gap fiscal cliff deal, and more encouraging US economic news has helped risk appetite and the ‘growth-sensitive’ NZD/USD start the year on the front foot.
Indeed, the NZD, AUD, and CAD have been the strongest performing currencies so far in 2013.
According to our currency flows monitor, real money and local corporate demand for the NZD on dips remains strong.
This helps explain the rapid bounce-back in the NZD/USD from its recent lows.
Net NZD flows amongst our corporate clients were in the 64th percentile last week. Net NZD buying against the AUD and JPY was particularly strong.
Looking ahead, NZD volatility should begin to settle down as traded volumes in currency markets begin to pick-up again. There’s also very little in the way of important local data this week (just building permits and trade data).
The first of the heavyweight releases comes next week with the Q4 QSBO business survey and CPI.
Across the Tasman, expect some attention on Australian retail sales (Wed) and RBA reserves data (Tues) this week.
In the short-term, we suspect the NZD/USD will continue to trade at the whim of offshore risk appetite and equity market sentiment.
Key in this regard is not only the strength of global data (which for the moment remains encouraging), but also US political developments with regard to the spending cuts portion of the fiscal cliff and the fast approaching US debt ceiling.
The fundamentals underpinning the NZD haven’t changed; the grinding NZ economic recovery is well placed to continue, NZ commodity prices are trending higher, and the global economy is past the worst.
As long as these supportive factors remain in play, NZD/USD dips towards 0.8000 will be short-lived in our view.
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Majors
The USD has marched higher since our last FX report. On a trade-weighted basis, the USD is around 1.4% stronger.
The JPY remains the key underperformer, with the high-beta CAD, AUD, and NZD the only currencies able to buck the stronger USD trend.
Investors’ relief over a 1 Jan deal to avert roughly two thirds of the US ‘fiscal cliff’ proved to be relatively short-lived. In part, this reflects the decision to delay a call on spending cuts until March. Investors now face the disheartening prospect of another two months’ worth of political wrangling and uncertainty.
After a punchy relief rally on the first trading day of the year, equity markets have since tracked broadly sideways.
Not only has the USD benefited from ‘safe-haven’ demand, but rising US bond yields have imparted some ‘fundamental’ support for the greenback as incoming US data and Fed rhetoric continues to paint a picture of an improving US economy.
This likely explains the inability of the EUR/USD to break above 1.3300, despite the broader ‘risk’ rally.
10-year US Treasury yields have climbed around 15bps so far in the New Year, to 8-month highs around 1.9%. This reflects not just positive US data (ISM manufacturing, ISM non-manufacturing, non-farm payrolls, pending home sales, and durable goods orders all printed above expectations), but also surprise comments from Fed officials in the December FOMC minutes that the QE scheme could be pulled as early as this year.
Higher US bond yields, coupled with new Japanese Prime Minister Abe’s relentless campaign to tackle deflation and force the BoJ to raise its inflation target, has produced the perfect backdrop for further USD/JPY strength.
The pair is up a further 4% since Christmas, and currently sits at 2½ year highs above 88.00.
Looking ahead, while low liquidity has spurred often skittish trading in currency markets of late, conditions should begin to normalise over the next week or so as traders return from holiday.
There are also some important events to watch out for that might help shape currency market sentiment. Both the ECB and Bank of England meet on Thursday. Neither is expected to alter the policy dial but investors will be on watch for any dovish rhetoric from the ECB, given recent hints a rate cut could be in the offing.
US data is reasonably thin on the ground but there is a bit of Fed speak to watch for. It’s a fairly hawkish line-up (most notably Richmond Fed President Lacker on Wed), which could reinforce the uptrend in US yields.
Other News:
Friday’s non-farm payrolls reveal a 155k jobs gain, marginally above the 152k expected, but less than that suggested by the stellar ADP employment figures. The unemployment rate edged up to 7.8% from 7.7% (7.7% expected).
Event Calendar:
7 January: EC Eurozone PPI;
8 January: AU trade balance; EC Eurozone retail sales & consumer confidence; EU German factory orders;
9 January: NZ building permits; AU retail sales; CH CPI, PPI, industrial production & retail sales;
10 January: NZ trade balance; NZ ANZ commodity prices; AU building approvals; UK BoE decision; EU ECB decision; US jobless claims;
11 January: UK industrial production; US trade balance.
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