By Mike Jones
NZD
The NZD/USD climbed back above 0.8370 overnight, recouping all of its Mondayitis-driven losses.
The surprise December surplus revealed in yesterday’s NZ trade figures (+$486m vs. -$105m expected) helped restore positive NZD sentiment.
But the currency’s gains were driven more by widening interest rate differentials. NZ-US 3-year swap differentials rose to a 5-month high of 248bps yesterday as the global bond market sell-off pulled up local yields.
Yesterday’s dip in the NZD encouraged plenty of buying interest from the local exporter community. This fits with what the BNZ Currency Flows Monitor is telling us.
In essence, NZ exporters (in aggregate) are now a little more inclined to use dips in the currency to rebuild hedging levels that were run down to very low levels last year.
Also notable over the past 24 hours is the fact the NZD/AUD has barely budged despite being hit with both the NZ trade data and yesterday’s encouraging bounce in Australian consumer confidence.
Plugging the latest NAB confidence numbers into our NZD/AUD valuation model sees the model’s short-term ‘fair-value’ range drop a smidge to 0.8000-0.8200.
In other words, the ‘fundamental’ drivers of the cross are still supportive of the uptrend. Given this, we’d expect to see a return to the recent 0.8050 highs in the NZD/AUD, contingent on what the RBNZ delivers at tomorrow morning’s policy meeting.
For today, there are a couple of pieces of local event risk to keep an eye on. December’s building permits data (due at 10:45am NZT) are expected to show a decent rebound (market +6%m/m).
We’ll also be watching RBNZ currency flows data to see if the ‘passive’ currency intervention that was restarted in November continued in December.
As noted earlier in the week, we still think a push back above 0.8400 looks likely for the NZD/USD, particularly if tomorrow’s US GDP/FOMC meeting double act reinforces the downward pressure facing the USD (see Majors). Near-term dips should be limited to support at 0.8280.
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Majors
The USD slipped against all of the major currencies overnight, in relatively listless trade. Investors are perhaps a little gun shy ahead of the upcoming US GDP data and FOMC meeting.
A broadly positive night for risk sentiment sapped some of the USD’s ‘safe-haven’ appeal. Global equity markets crept into positive territory overnight (the S&P500 is up around 0.4%), and the VIX index (a proxy for risk aversion) fell from 13.9% to around 13.2%.
A shock drop in US consumer confidence (58.6 vs. 64.0 expected), probably didn’t do USD sentiment any favours either. Confidence is now at 14-month lows, with the recent (payroll) tax hikes in the US likely contributing.
Most of the major currencies enjoyed a modest pop against the broadly weaker USD. The EUR/USD rose ½ cent or so, but chatter about options-related resistance at 1.3500 limited the gains to around 1.3495.
The NOK and SEK were the notable outperformers on the day, with the AUD not far behind (hat tip to yesterday’s slightly better Aussie business confidence figures).
Looking ahead, tonight’s US Q4 GDP figures and tomorrow morning’s FOMC meeting should shake markets out of their slumber. The risk is that these events simply reinforce the downward pressure on the USD.
The GDP data has plenty of potential to underwhelm, even if consensus already expects a weak 1.1% (annualised) result.
Moreover, a reminder from the Fed that the QE taps remain fully open at US$85b worth of monthly bond purchases, with no timeframe given for any stimulus exit, could undermine the greenback both from a yield perspective and through its ‘pro-risk’ implications.
Other News:
*November S&P/Case Shiller index shows US house prices rising 5.5% y/y (the strongest annual pace since August 2006), broadly as expected.
*Reserve Bank of India cuts rates 25bp and injected more liquidity, the first such easing since April.
Event Calendar:
30 January: NZ building permits; JN retail trade; EU economic confidence; US ADP employment; US GDP; US FOMC;
31 January: NZ RBNZ OCR review; AU home sales; EU German unemployment & CPI; US jobless claims;
1 February: NZ migration; NZ RBNZ Governor speech; CH manufacturing PMI; EU European PMIs; US non-farm payrolls; US ISM manufacturing.
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