By Mike Jones
NZD
Yesterday’s onslaught of positive NZ data refuelled the NZD juggernaut.
The NZD/USD flirted with 0.8500 overnight and the TWI climbed to a fresh 5½ year high. At 77.00, the TWI is now within spitting distance of 2007’s 77.20 post float high.
Yesterday’s NZ PMI, consumer confidence, and food price data were all well on the stronger side of expectations.
The underlying message from the data was clear: the NZ economy is picking up steam and the RBNZ cannot afford to be complacent about current low inflation.
Still, with the TWI now some 5% above RBNZ forecasts and NZ swap rates rocketing higher, the Bank will to have to factor the restraining effect of much tighter financial conditions into their forecasts ahead of the March MPS on 14 March.
Key in the recent bout of NZD outperformance has been the building NZD/AUD uptrend. This has continued over the past 24 hours.
The cross scaled 2½ year highs above 0.8200 amid strong demand from leveraged and speculative accounts to top up long positions.
It’s worth noting, the latest update of our short-term NZD/AUD valuation model points to a 0.8050-0.8250 ‘fair-value’ range. This suggests we’ll need to see further improvement in NZ-AU ‘fundamentals’ for the cross to sustain near-term gains above 0.8250.
Our mid-year forecast is 0.8500, with 0.8800 expected by year-end.
Overnight, a broadly stronger USD knocked the top off the NZD/USD (see Majors). The currency slipped from above 0.8500 to around 0.8470.
Today’s fourth quarter NZ retail sales figures present the next key hurdle for the NZD. The consensus expects a 1.4% quarterly gain. BNZ economists are at 1.5%, with the balance of risks skewed toward something even stronger.
This suggests a re-test of 0.8500 should not be ruled out for the NZD/USD today. Initial support will be found at previous resistance around 0.8450, with deeper support at 0.8400.
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Majors
The ‘safe-haven’ USD and JPY outperformed overnight after weak European GDP data took a toll on investor sentiment. Not surprisingly, the EUR/USD underperformed, tumbling around a cent to 1.3330.
Analysts had expected a decline in Q4 Eurozone GDP. But what they got was the biggest quarterly contraction since the GFC. Growth backpedalled 0.6%q/q (-0.4% expected) with the downside surprise spread across most of the key European economies. Italy’s undershoot (-0.9% vs. -0.6%) was amongst the largest.
The knee-jerk EUR collapse following the data saw the USD start the night on the front foot. And a subsequent cooling in risk sentiment added to the greenback’s safe-haven appeal.
Global equity markets dipped into the red, benchmark yields fell, and commodity prices lost ground. Risk off, in other words.
The European GDP data is certainly EUR negative but it is a lagging indicator. More recent data has been a little more encouraging (albeit with much of the rebound concentrated on Germany) and financial conditions remain much more supportive than last year.
As a result, we doubt the EUR/USD sell off will extend. We look for support in the 1.3275-1.3310 window to hold.
Elsewhere, recent USD/JPY volatility continued (1-month vols hit 1½ highs around 13.3% yesterday). A pledge from the G20 to “refrain from competitive devaluation” was taken as a not so subtle shot across Japan’s bows, taking USD/JPY from 93.60 to around 93.00.
For today, we may get a few more headlines from the side-lines of the G20. But we’d suggest that most of the G20 ‘news’ is behind us.
The official communique looks like it will be released sometime over the weekend. Focus will go back on the US tonight with industrial production, New York PMI, and Michigan consumer confidence data all due for release.
Other News:
*The BoJ kept policy unchanged as expected yesterday. There was also little change to the BoJ’s forecasts or rhetoric.
Event Calendar:
15 February: NZ retail sales; UK retail sales; US industrial production; Fed’s Pianalto speaks.
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