By Mike Jones
NZD
The surge higher in the NZD screeched to a halt last week.
But on Friday, the NZD/USD re-gathered some of its poise, climbing from 0.8350 to almost 0.8400.
As if things weren’t bad enough for the UK, ratings agency Moody’s snatched away the UK’s prized AAA rating on Saturday morning. The GBP has taken a hammering as a result.
While the GBP’s woes have seen the NZD/USD open the week on the back foot, heavy NZD/GBP demand is limiting the fallout. NZD/GBP has leapt from below 0.5500 to almost 0.5540 – a new post float high. Further gains look likely.
Pressure on the Bank of England to rescue the UK is mounting and NZ-UK interest rate differentials are likely to keep moving higher.
The week ahead is shaping up as a busy one for markets. Local highlights will be Thursday’s ANZ business survey, and Friday’s OTI trade data.
We expect business confidence to remain robust (albeit with some negative impacts from the drought), and the OTI terms of trade to bounce some 7.3%. Outcomes along these lines have the potential to drive the NZD higher.
However, global risk sentiment remains the bigger driver of the currency. And there are plenty of influences on risk appetite to balance this week.
These include the Italian election results, a Testimony from Fed chairman Bernanke, a possible announcement of the new Bank of Japan Governor, the release of February manufacturing PMIs (including the HSBC ‘Flash’ measure for China today at 2:45pm), and the countdown to the deadline for US spending cuts.
It could be a volatile ride in the NZD/USD.
All up, we find the downside a little more compelling in the near-term.
For one, the NZ data tone looks unlikely to maintain its red hot pulse. And while Bernanke may reintroduce downward pressure on the USD, the Italian elections and US sequester deadline pose negative risks for sentiment.
Note also that speculative positioning in the NZD has returned to ‘extreme’ levels.
At 24.7k, net long NZD positions are sitting at the highest level since July 2007 according to the latest IMM data.
The potential for a sharp unwinding of speculative longs is a downside risk to the NZD/USD.
For today, initial NZD/USD support will be found at 0.8310, with resistance likely to be encountered on bounces towards 0.8400.
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Majors
Global equity markets and risk sentiment clawed back some lost ground on Friday night, helped by dovish Fed rhetoric and a stellar February German IFO. Still, in currency markets, consolidation was the order of the day.
The big exception was GBP.
Thirty minutes before the FX market closed, ratings agency Moody’s sent markets into a tailspin by cutting the UK’s rating one notch to aa1.
The GBP/USD plunged from 1.5250 to 1.5160 in response (0.5115 Monday open).
The fallout was limited to some extent by Moody’s ‘stable’ outlook, and the fact the downgrade was hardly a surprise. But with pressure on the BoE to ease now likely to ramp up even further, GBP underperformance looks set to continue.
The week ahead could be a very eventful one for currency markets.
Official results from the weekend’s Italian elections are due on Tuesday, with exit polls tonight. The most ‘market friendly’ result would be a Bersani/Monti victory. The political uncertainty of any other result would likely weigh on risk sentiment.
An unlikely coalition win for Berlusconi would be the worst possible outcome.
We expect Fed Chairman Bernanke to toe a familiar dovish line during his Testimony to the Senate on Tuesday night. Bernanke will likely recommit to the Fed’s asset purchase programme, which could ease fears of an early exit from QE. At the margin, this could underpin equity markets and help the USD unwind some of its recent gains.
Post Bernanke, investor focus will likely switch to the March 1 deadline for the US sequester (US$100b worth of spending cuts due to kick in unless the law is changed).
Another bout of US political shenanigans and worries about fiscal headwinds has the potential to briefly unsettle investors’ risk appetite and knock back ‘growth-sensitive’ currencies like the AUD, CAD, and NZD.
Data-wise, global PMI reports will be the highlight for the week. For the most part, investors expect the February PMIs to be flat or down relative to the positive January readings.
In Japan, investors are on tenterhooks about when PM Abe will announce his nominee to head the Bank of Japan. We should get an announcement this week. Weekend reports suggest Mr Kuroda is the front runner. Regarded as a dove, Kuroda’s confirmation as BoJ governor could be the trigger for a USD/JPY break above the recent 94.45 highs.
Other News:
* EU Commission releases its latest forecasts. Eurozone GDP is expected to contract 0.3% in 2013 with a slow recovery to 1.4% expected for 2014.
* Fed officials Rosengren and Powell come out in defence of the Fed’s asset purchase program, while Bullard says policy will remain “easy” for some time.
* ECB announces a lower-than-expected LTRO repayment (€61b vs. expectations of around €130B).
* German IFO 107.4 in February (104.9 expected).
Event Calendar:
25 February: CH HSBC manufacturing PMI; UK house prices; US Chicago Fed index;
26 February: AU RBA’s Debelle speaks; US Fed’s Lockhart speaks; NZ RBNZ 2-year inflation expectations; US house prices, consumer confidence, and home sales; US Fed’s Bernanke testifies;
27 February: NZ net migration; NZ trade balance; NZ FM English speaks; UK GDP; US durable goods orders; US pending home sales; EU ECB’s Draghi speaks;
28 February: NZ building permits; AU new home sales; NZ ANZ business confidence; AU Capex; EU German unemployment; US jobless claims;
1 March: NZ terms of trade; CH PMI; EU PMIs; UK PMI; US ISM manufacturing.
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