Now that 84 USc has been bettered, BNZ says further rises to 84.75 USc are "odds on"

By Mike Jones

NZD

It’s been onwards and upwards for the NZD over the past 24 hours. The NZD/USD has climbed from 0.8380 to almost 0.8450, reflecting a trifecta of supportive factors.

Yesterday’s November trade data supported the notion that NZ Q4 GDP growth is looking a whole lot better than Q3. Both imports and exports raced ahead of expectations, leaving the monthly trade deficit more or less on expectations at NZ$700m.

But it was the Chinese trade data later in the afternoon that really got the NZD going. The 14.1%y/y surge in exports (5% expected) and 6%y/y gain in imports (3.5% expected) confirmed the Chinese rebound has got legs and 2013 growth of 8% remains on track. Moreover, sifting through the data revealed an acceleration in China’s commodity imports, a positive for commodity exporters like NZ and Australia.

The AUD/USD leapt ½ cent to 1.0550 in the wake of the data, with the NZD/USD dragged above 0.8400 in sympathy. The rally continued into the offshore session as the Chinese data helped reinvigorate global equity and commodity markets.

Overnight, it was all about the ECB.

Rates were left unchanged as expected, but markets were left a little surprised by the ECB’s reluctance to consider a rate cut. A knee-jerk lurch higher in the EUR/USD following the press conference lifted the NZD/USD to almost 0.8450. NZD/EUR tumbled from 0.6450 to almost 0.6370.

With an ECB rate cut seemingly off the table for now, we suspect a near-term top in NZD/EUR has been established at 0.6450. A further fall back towards 0.6300 looks likely over coming sessions. Interim support will likely be found at the 0.6327 200-day moving average.

We noted yesterday that a break of 0.8400 in NZD/USD would bring the 0.8475 December highs into view as the next target. A test of this level still looks odds on, although there is some event risk to watch for today in the form of the Chinese December CPI. An increase from 2.0%y/y to 2.3% is expected.

Anything substantially north of this may cool enthusiasm towards the AUD and NZD as investors contemplate possible Chinese policy tightening later in the year. 

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Majors

The USD weakened sharply overnight, hit by the double whammy of buoyant risk sentiment and aggressive EUR/USD buying in the wake of the ECB decision. The narrow DXY index has slipped about 1%. The JPY has also underperformed.

The ECB left its main refinancing rate unchanged at 0.75%, and the deposit rate at 0.0%, as expected. The surprise for markets came from President Draghi’s revelation the decision was unanimous. This of course was in stark contrast to the ECB December meeting, where there was "wide discussion" about a rate cut.

Indeed, Draghi took great pains to reinforce to investors that a rate cut is simply not on the table at present. Rather than any big improvement in the economic outlook of the Eurozone (ECB forecasts appear little changed), this reflected the so-called “reduced fragmentation” of markets following last year’s measures to shore up financial stability.

The ECB’s more hawkish tone lit a rocket under the EUR/USD, which soared around 1½ cents to 1.3250 as rate cut expectations were priced out. German benchmark 10-year bond yields have climbed 6bps to 1.56%.

Along with the perky EUR, a fairly buoyant 24 hours for risk sentiment has added to the downward pressure on the USD, keeping the NZD, AUD, and GBP well supported. Global equity markets have notched up small gains, and oil and gold prices are both up around 1%. The positive China data looks to be the main driver here, but a well-received Spanish bond auction is also a contributor.

The Bank of England left interest rates and its asset purchase target unchanged at 0.5% and £375b respectively. Given our expectation that UK output will fall in Q4, expectations of further QE may well increase over the course of the year. A move from May onwards is certainly possible should survey data show a weak second quarter. This supports our view of GBP underperformance. We’re are long EUR/GBP from 0.8080, looking for a test of 0.8225 near-term.

We also believe the EUR/USD rally has a little further to go. This is particularly so if the upcoming army of Fed speakers (culminating with chairman Bernanke’s address on 14 January) lean against the market’s less dovish interpretation of the December FOMC minutes. Key resistance for the EUR/USD will be encountered at 1.3310.

Event Calendar:

11 January: UK industrial production; US trade balance.

All its research is available here.