RBNZ’s ‘passive’ currency intervention stepped up a gear in December; NZ$ clearly over-valued

By Mike Jones

NZD

After flirting with 0.8400 yesterday afternoon, the NZD/USD crashed back to earth overnight. A bout of heavy NZD/EUR selling dragged the kiwi all the way back to around 0.8300.

All eyes last night were on US GDP data for Q4. While the headline number was terrible (-0.1% annualized), there were some saving graces in the details (see Majors). So while the USD weakened in the wake of the data, a wholesale collapse was avoided.

The bigger driver of currency markets overnight was a vicious bout of EUR cross buying. This appears to be mostly technical rather than fundamental in nature following the EUR/USD’s break above 1.3500.

NZD/EUR has tumbled from 0.6220 to 7-month lows below 0.6130. We said on Tuesday the downward NZD/EUR correction had further to run. Following last night’s break below 0.6160, the way is now clear for a deeper pullback towards 0.6050.

The RBNZ’s ‘passive’ currency intervention stepped up a gear in December. That was the message from yesterday’s RBNZ currency flow figures. The Bank sold a net $199m worth of NZD in December, up from the $64m net sold in November.

Of course, $200m over the course a month is a drop in the bucket as far as the NZD market goes (NZ$32b gets turned over per day on average).

Clearly, the Bank is not trying to influence the level of the NZD/USD. But the increased activity does tell us a couple of things.

First, November’s selling was no flash in the pan. It indeed marked the resumption of the passive intervention the bank employed successfully through the 2008 period of currency strength.

Second, the Bank believes the NZD is overvalued.

This is a view that will receive more airtime in today’s RBNZ policy rate announcement (due at 9am). But before that, the NZD has the US FOMC announcement to negotiate (8:15am NZT).

We’re not expecting anything particularly new from either central bank, but the close proximity of the meetings does set the stage for a volatile hour or so in the NZD/USD.

We continue to hold a mild upside bias for the week. Support is eyed at 0.8280, with initial resistance expected on bounces towards 0.8400.

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Majors

The USD remains on the back-foot. Still, last night’s bout of USD weakness seems to mostly reflect healthy EUR gains rather than across the board USD selling.

We’d expected US GDP figures to underwhelm and they certainly did that. The US economy shrank 0.1% (annualised) in Q4, well below analyst expectations for a 1.1% expansion.

Fears of a stalling in the US recovery in the wake of the numbers quickly took a toll on US stocks and the greenback.

But there were a few saving graces. Big one-off declines in defence spending (-22.2%) and inventories were responsible for most of the weakness.

US consumption growth and business investment actually picked up. What’s more, an encouraging read on ADP employment (192k vs. 165k expected) suggested the US labour market is still in recovery mode.

So the underlying strength of the US economy is not as weak as the GDP figures would suggest. This likely limited the fallout on US stocks (which have rebounded back to around flat) and the USD overnight.

Indeed, USD losses look to be more reflective of EUR strength. Notable here is the fact that US bond yields are little changed, USD/JPY is a little higher, and the NZD/USD and AUD/USD are actually weaker.

The EUR/USD finally broke above 1.3500, to claim new 14-month highs around 1.3580. Heavy demand for EUR crosses (particularly against JPY, AUD, and NZD) has acted to restrain gains in the rest of the majors.

It’s tempting to think the EUR’s recent strong gains leave the single-currency open to a correction. This is particularly so given European economic fundamentals, while improving, remain fairly weak.

However, we think there is some potential for a USD-negative FOMC statement this morning to provide a further boost to the EUR.

We expect the Fed to recommit to its QE programme of US$85b worth of monthly bond purchases, and remind the market there is a long way to go before tighter monetary policy is likely.

Other News:

* Spanish Q4 GDP undershoots expectations at -0.7%q/q (-0.6% expected).

*Eurozone economic confidence improves by more than expected (89.2 vs. 88.2 expected).

Event Calendar:

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.

All its research is available here.