Boost for GBP on speculation that Qatar was looking to invest in UK infrastructure projects

By Kymberly Martin

NZD

The NZD dropped sharply after a more dovish RBNZ meeting yesterday, but has recovered overnight to sit at 0.8220 this morning.

The general tone of yesterday’s RBNZ statement was more dovish than at its previous meeting. The ‘overvalued’ NZD received quite a lot of discussion in the MPS.

While the Bank appears to have no intention of directly intervening in the currency, (not least as it is unlikely to be effective) it does discuss the potential for adjusting the OCR track if NZD strength persists.

As the market reduced expectations of rate hikes in the year ahead the NZD/USD initially fell sharply. The market now priced just 7bps of hikes by year-end, down from almost 20bps earlier in the week.

The NZD/USD gapped from 0.8260 before finding support at 0.8160. Overnight however, it has clawed its way back to 0.8220.

On the crosses, the NZD fell relative to a rebounding GBP (see Majors). This has taken the NZD/GBP back down to 0.5450.

The NZD extended losses relative to the AUD. The move was exacerbated by a stronger-than-expected AU employment report.

The NZD/AUD has slipped close to its lows for the year, at 0.7910. Now critical support for the cross is eyed at the overnight lows around 0.7880 that also marked the lows on the cross at the turn of the year.

After yesterday’s excitement it is likely to be a quieter day for the NZD and cross today. The BNZ PMI will be released along with consumer confidence.

We would look for the PMI to remain in expansion (previously 55.2). There are no data releases on the other side of the Tasman.

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Majors

The strongest theme overnight was USD weakness. The GBP was the strongest performer over the past 24-hours.

Equity markets put in a good performance overnight. The Euro Stoxx 50 closed up 1.5% and the S&P500 is currently up 0.40%.

The EUR was stronger overnight as the two day European summit kicks off today. German Chancellor Merkel the flag-bearer for austerity seemed to be placing more emphasis on growth as she entered the meeting; “what matters now is putting life into this growth pact”.

“We will have one focus above all: the fight against youth unemployment”. Youth unemployment sits over 50% in Greece and Spain. The EUR/USD climbed from overnight lows around 1.2920 to sit at 1.3000 this morning.

The GBP/USD was also boosted overnight. There was speculation that Qatar was looking to invest in UK infrastructure projects, boosting demand for sterling.

In addition, BoE Governor King was quoted as saying “that recovery is in sight”. The move in sterling may also have been exacerbated by a short squeeze, as short GBP positions had become widely held. The GBP/USD gained over 1%, rising from 1.4950 to 1.5100.

The AUD/USD was also stronger after a better-than-expected AU employment report. February jobs growth of 71.5k was well above expectation, enabling the unemployment rate to remain at 5.4%. It has hovered around this level for the past five months.

With the domestic backdrop showing greater signs of stability the market has reduced expectations of further RBA rate cuts. The market now sees only 6bps of cuts in the year ahead.

The resulting moved higher in AU yields helped underpin the AUD. The AUD/USD sits at 1.0380 this morning, its highest level since early February.

Tonight, the key data with potential to impact on currency markets are EU employment and CPI data and US Empire Manufacturing and University of Michigan Consumer Confidence.

Event Calendar:

15 March NZ: PMI.

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