By Mike Jones
NZD
The NZD/USD opens the week at familiar levels around 0.8420. In contrast, the NZD/JPY starts the week at 5-year highs above 82.50, as the weakening JPY trend remains in full force.
The two key themes dominating currency markets last week were 1) JPY weakness after the Bank of Japan pulled out the easing bazooka, and 2) the noticeable softening in US growth momentum as the ‘sequester’ made its presence felt in March data.
Not only did the ISM surveys underwhelm, but US employment data on Friday was downright miserable.
Both themes had the effect of further inflating the NZD, as USD and JPY sentiment hit the skids. NZ-US and NZ-JP interest rate differentials rose over the week, bolstering ‘fundamental’ support for NZD/USD and NZD/JPY, and increasing the chances recent gains are sustained.
Looking ahead, the coming week’s event risk schedule looks a little quieter.
Globally, investors are still absorbing last week’s stunning BoJ policy change. Our view is that the new easing measures are a clear JPY negative in that market expectations have been exceeded and the BoJ planned balance sheet expansion will outstrip that of the US Fed by a clear margin.
This leaves us all the more comfortable with our forecast for ongoing NZD/JPY appreciation. The problem is our year-end 82.50 forecast has been achieved already! We’ll likely revise up this forecast in coming days to 85.00-90.00.
Domestically, we can’t see anything in the coming week’s data to upset the NZD’s applecart. We believe Tuesday’s QSBO business survey will be upbeat, signalling core growth of at least average.
Meanwhile, QVNZ/REINZ house price data are likely to reveal further heat in house price inflation. Nothing here to upset OIS markets’ pricing of 10-15bps worth of RBNZ rate hikes over the coming 12 months.
Overall, we suspect rising interest rate differentials and weaker USD sentiment will maintain upward pressure on the NZD/USD this week.
Initial resistance will be encountered at 0.8450 ahead of the more important 0.8500 barrier. For today, keep an eye out for an afternoon speech from RBNZ Deputy Governor Spencer on “Housing’s Role in the NZ Economy.”
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Majors
Disappointing US employment figures saw markets adopt a more cautious tone on Friday. Equity markets, commodity prices, and bond yields all declined, and US bond yields and the USD underperformed.
Just 88k US jobs were added in March, less the half the 190k expected. A small fall in the unemployment rate (to 7.6% from 7.7%) provided little comfort as it was driven by whopping 496k decline in the size of the labour force (bringing the participation rate to a 40-year low of 63.3%).
Fears the US is entering yet another ‘spring slowdown’ (in the same vein as 2011 and 2012) knocked US bond yields for six.
The 10-year Treasury yield ended the night 7bps lower at 1.71%. Crumbling yield support weighed on the USD across the board, although declines were most marked against the JPY.
USD/JPY leapt another figure, to a fresh high above 97.50 (98.00 this morning).
The up thrust from the weaker USD also allowed the EUR/USD and GBP/USD to finish the week on the front foot around 1.3000 and 1.5340 respectively.
The global event risk calendar cools down a bit this week, after all of last week’s excitement. In the US, investors will be eyeing March retail sales and consumer confidence to gauge the impact of the sequester and slowdown elsewhere in the economy.
There’s also a boat load of Fed officials due to speak. Talk of ‘tapering’ asset purchases might be wound back a bit following Friday’s weak jobs numbers, as noted by Goldman Sachs’ Hatzius over the weekend.
In contrast, the FOMC minutes on Thursday morning are unlikely to reveal any new insights into Fed thinking.
Note also that the Q1 US corporate earnings season kicks off this week; the consensus expects quarterly revenue growth of 0.8% (1.2% ex-financials) for S&P500 companies.
The latest Eurogroup/central bank governor talkfest in the latter stages of the week is unlikely to contain anything important for markets. As such, EUR sentiment will be determined by the relative strength of European data.
German and French industrial production data tonight (+0.3%m/m expected for both) will be crucial here.
In the absence of any major data surprises, we suspect doubts about the strength of the US economy will see the USD continue to dribble lower this week.
However, ongoing investor interest to buy USD/JPY on dips will limit the extent of USD downside. Initial support for the USD index is eyed at 82.00.
Event Calendar:
8 April: AU job ads; NZ RBNZ’s Spencer speaking on housing; AU foreign reserves; EU German industrial production;
9 April: NZ QSBO; US Fed’s Bernanke speaks; NZ QVNZ house prices; AU NAB business confidence; CH CPI; US Fed’s Lacker & Lockhart speak;
10 April: NZ ECT data; AU RBA’s Kent speaks; AU consumer confidence; CH trade balance; US FOMC minutes;
11 April: NZ PMI; AU employment; EU German CPI; US Fed’s Plosser speaks;
12 April: NZ food prices; EU Eurogroup meeting; US retail sales; US Fed’s Rosengren speaks.
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