English: RBNZ intervention to lower NZD would be tantamount to firing a “peashooter”

By Mike Jones

NZD

The NZD was side-lined overnight. With all the attention on GBP and JPY, the NZD/USD did the sideways shuffle inside a narrow 0.8400-0.8430 range.

Yesterday’s appearance of finance minister English before the FEC Select Committee revealed a slight change in the government’s exchange rate rhetoric.

Rather than blasting the NZD as ‘overvalued’, English noted NZ’s economic outperformance is largely behind the strong currency, and RBNZ intervention to lower the NZD would be tantamount to firing a “peashooter”. We agree.

Fundamental support for the NZD continues to build. As NZ swap yields have pushed higher, NZ-US 3-year swap differentials have climbed from 230bps at the start of the year to 255bps currently.

Rising interest rate differentials should support further NZD/USD appreciation, particularly with the AUD rapidly losing its yield appeal. AU-US 3-year swap differentials have fallen to 260bps and our view of additional RBA rate cuts means additional declines are in store.

Overnight, all eyes were on the UK, and the implications of the Bank of England’s latest missive for the GBP. In the event, a toxic mix of lower BoE growth forecasts, but higher inflation took a toll on the GBP.

NZD/GBP was launched from below 0.5380 to a new post float high above 0.5410 as a result. Further gains look likely.

Not only is there a clear risk the UK losses its AAA sovereign rating this year, but relative growth and monetary policy expectations are both skewed in favour of ongoing NZD/GBP strength. We forecast 0.5550 by year end.

For today, there’s a few local data releases to keep an eye on, although none of them should ruffle the NZD.

The BNZ PMI is due at 10:30am, food prices at 10:45am, with ANZ consumer confidence at 1pm. Short-term support for the NZD/USD will be found at 0.8380 (ahead of deeper support at 0.8280) with bounces towards 0.8450 likely to attract sellers.

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Majors

Currency markets have broadly consolidated over the past 24 hours, with most of the majors little changed. The exception is the underperformance of the GBP following the Bank of England’s Quarterly Inflation Report (QIR).

Markets adopted a slightly more downbeat tone overnight. An early rally in US stocks ran out of steam, and the VIX index (a proxy for risk aversion) climbed from 12.7 to almost 13.2.

Against this less buoyant backdrop, the USD found a bit of rare support. A solid, if unspectacular, 0.2%m/m increase (+0.1% expected) in US January retail sales may have assisted the greenback.

Still, most of the attention was on GBP. The QIR was a fairly sombre read. UK growth forecasts were revised down to 1% for 2013 and 1.9% for 2014. Yet inflation is now expected to remain above the BoE’s target until 2016.

Markets were a little bewildered by it all. UK gilt yields soared in response to the higher inflation outlook, but the GBP/USD slumped almost a cent to 1.5560.

We don’t believe the troublesome UK inflation outlook will elicit any tightening response from the BoE. Indeed, the Bank effectively signalled its focus remains on rejuvenating the flatlining economy.

Given this, our view of ongoing GBP underperformance remains intact. EUR/GBP jumped from 0.8580 to 0.8680 overnight and we suspect a return to the recent 0.8700 highs is likely.

Looking ahead, the G20 meeting gets underway tonight. This should be a non-event for markets, particularly with the G7 stealing most of its thunder.

The Bank of Japan also meets today. Outgoing Governor Shirakawa looks set to keep policy unchanged amid some recent signs of life in the Japanese economy.

We don’t think this will be particularly disappointing for investors who are generally more focused on the likely makeup of the new BoJ leadership.

We look for the JPY to weaken further with USD/JPY regaining the 94.40 highs in coming days, pushing on towards 100.

Other News:

*Eurozone industrial production rises 0.7% in December (+0.2% expected), an encouraging sign but probably not enough to prevent a sharp decline in Q4 GDP.

*Headlines suggesting the ECB is worried about euro strength take the EUR/USD off its overnight highs around 1.3520.

Event Calendar:

14 February: NZ PMI; JN GDP; NZ ANZ consumer confidence; JN BoJ; EU GDP; G20 meeting begins;

15 February: NZ retail sales; UK retail sales; US industrial production; Fed’s Pianalto speaks.

All its research is available here.