Rising NZ- AU interest rate differential helping to underpin the NZ$/A$ cross rate

By Kymberly Martin

NZD

The NZD/USD has traded fairly quietly over the past 24-hours to sit around 0.8450 currently.

Yesterday’s BNZ Performance of Services index continued the recent theme of solid domestic data. The index moved up to 52.6 in January from 51.5 previously.

While activity was seen as patchy across different regions, industries and sizes of businesses, the reading represents solid, if unspectacular, expansion.

The NZD was well supported overnight in markets thinned by US Presidents holiday.

However, the NZD/USD found resistance at 0.8460, falling back to trade at 0.8450 this morning. Key resistance for the NZD/USD remains at 0.8530. Near-term support is eyed at 0.8420.

The NZD/AUD has traded between 0.8180 and 0.8220 over the past 24-hours. The key for the cross today will be the release of RBA minutes. If these serve to increase market expectations for future RBA easing, this would likely push the NZD/AUD higher.

Key near-term resistance remains at last week’s peak around 0.8230 that marked 2 ½ year highs.

Over the medium-term we continue to see steady upside to NZD/AUD, as the RBA likely cuts further than currently prices by the market, and the RBNZ begins to steadily withdraw monetary stimulus.

The rising NZ-AU interest rate differential would help underpin the cross.

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Majors

It was a quiet night in currencies as the US market was closed to celebrate Presidents Day. Ranges were fairly tight, but generally the USD held up well relative to its peers.

Globally, markets were fairly subdued. While our risk appetite index maintained a healthy 83% level, European equities closed close to flat.

The USD currency index opened the week a little higher and managed to hold onto that level, sitting around 80.60 at present.

The EUR/USD briefly surged higher after data showing the region maintained a solid current account surplus in December. However, touching 1.3380, it soon slipped back to trade at 1.3350.

The GBP continued to slip quietly lower overnight, to 1.5460. It is approaching the crucial support line around 1.5290. This has marked the bottom of the currency’s trading range on numerous occasions since mid-2010.

Focus will return to the GBP on Wednesday with the release of BoE minutes and UK employment data.

While the USD/JPY was fairly range-bound around the 93.90 level, the international dialogue around the JPY continued. Earlier yesterday, P.M Abe said he had no intention of indicating what level is good for the Yen.

Further, in his view, the major reason for the recent fall in the JPY is the change in Japanese monetary policy.

Overnight, ECB President Draghi appeared to gently corroborate this view, saying most of exchange rate movements seen lately were not the result of explicit targeting. Expect the debate to continue.

The AUD bobbed around between 1.0280 and 1.0310 overnight. This afternoon (1.30pm NZT)  RBA minutes will provide some more colour on how the RBA is viewing the maturing of the mining cycle, and prospects for further rate cuts. Currently the market prices a 30% chance of a rate cut at the March meeting.

Tonight, the German ZEW survey will be released as a pre-cursor to the more significant IFO survey on Friday. US NAHB housing data will also provide the latest update on this rapidly recovering sector of the US economy.

Eurozone PMI data is released on Thursday. Also keep an eye on Italian political polls in the lead up to elections at the end of the week.

They key US data release will be Tuesday’s and Wednesday’s housing data and Thursday’s Philadelphia Fed survey.

All its research is available here.