FX markets guarding against downward revisions to ECB’s inflation forecasts and risk of additional policy easing

By Mike Jones


NZD (along with AUD and NOK) are showing the most resilience to US dollar strength but is still lower on the night. The retreat from 0.8350 seems to have defined the immediate range for the NZD.

The NZD book saw ongoing macro/leveraged funds as sellers in our flows and there’s an increasing incidence of similar accounts purchasing Put Option strategies to protect downside risks.

While this has been occurring, the overhang of a “long” speculative market, as evidenced by IMM data, is still a feature. Domestic and investor appetite remains keen to partake in any probe to the downside, with support expected once again nearer 0.8200.

All the while, the markets are no doubt busily trying to gauge the influence of the intensifying local drought on the NZ dollar.

One the one hand, it is boosting dairy export prices, as was stark from yesterday’s international diary auction, where the average USD price surged 10.4%, to be a full 54% above their mid-May 2012 lows.

We expect further upside over the near term. Fonterra Chairman, John Wilson, overnight suggested it was too early to lock and load a higher dairy payout as a consequence, just yet.

More fundamentally, the local drought is hitting on-farm production, which will take its usual big chunks out of GDP. We are in the process of re-estimating the intensity of the hit to Q1 and Q2 GDP.

Thankfully, there are signs of increased momentum in most other areas of the economy (witness last week’s barrelling ANZ business survey), which will be largely unaffected by the drought. Construction remains the prominent example.

Data wise, keep an eye on this morning’s (10:45am) NZ Q4 Wholesale Trade data. Formally, we are looking for this to register a modest increase in its nominal sales.

But we have our fingers crossed for a stronger gain, in order to bump up our estimate of Q4 GDP growth, still at 0.7% after yesterdays’ as-expected construction gain of 1.8%.

Also, note Quotable Value NZ has delayed its February housing report until tomorrow (Friday). It was previously scheduled for midday today.

Meanwhile, Australia’s data deluge continues today with international trade figures and the construction PMI.

Yesterday’s reported Q4 GDP increase, of 0.6%, was in line with market expectations. And although Q3 was revised up to 0.7, from 0.5%, the Q4 result underscored weakness in domestic demand, which, in terms of non-mining investment, is a key factor for RBA in market eyes.


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US stocks have (just) extended Tuesday’s gains with the DJIA leading the way (+0.4%). Bigger moves are being seen in other asset classes where Treasury yields have been marching higher and the US dollar is firmer across the currency board.

Commodity price action is mixed with oil lower but base metals and gold both firmer despite the firmer dollar. It is again hard to characterise markets as either risk ‘on’ or ‘off’, reflected in the VIX which is precisely unchanged heading into the New York close.

US data has had a hand in driving up stock prices and bond yields, in particular the bigger than expected rise in the ADP employment survey, up 198k (market 170k) and ‘capital goods ex-defence, ex aircraft’ orders release now put at +7.3%, initially +6.1%.

Currency price action owed something to higher bond yields supporting the dollar but, more importantly, reflects pre-positioning in front of today’s ECB and BoE meetings; otherwise, higher Bund yields and further compression in euro-peripheral bond spreads would be expected to be associated with a stronger, not weaker, euro.

FX markets are guarding against downward revisions to the ECB’s inflation forecasts and the attendant risk of some form of additional policy easing.

There is also an evident fear that Sterling will be hit once more, should the BoE vote in favour of additional QE.

The BoJ conducts its last policy meeting under the Governorship of Masaaki Shirakawa today and which should prove to be a non-event ahead of next month’s regime change to new Governor Kuroda.

Other News:

*The Federal Reserve Beige Book still told of modest to moderate growth in the US economy, while the ADP jobs number (+198k) was a positive pointer to Friday’s payrolls.

*Ex-BOJ member, Mizuno, suggests Governor in waiting, Kuroda, will hit “Wall of Reality” in respect to his stimulus policies.

*Eurozone Q4 GDP confirmed at -0.6% (-0.9% y/y).

Event Calendar:

7 March: NZ wholesale trade; Bank of Japan decision; Bank of England decision; ECB decision; US jobless claims;

8 March: NZ manufacturing activity; JN GDP; CH trade balance; US non-farm payrolls; US unemployment rate.

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