By Mike Jones
NZD
It’s been onwards and upwards for the NZD over the past 24 hours. In fact, the NZD has been the strongest performing G10 currency. The NZD/USD opens around 0.8575 – the highest since August 2011.
The drivers of the stronger NZD remain the same; namely, bubbly offshore risk sentiment and a higher NZD/JPY.
Markets’ feel good vibe began in Asia yesterday following China’s March trade figures.
A surprise US$0.9b deficit (US$15b surplus expected) was ignored in favour of the 14.1%y/y surge in imports. The implied reacceleration in Chinese domestic demand underscored solid gains in Asian stocks yesterday.
The positive mood soon spilled over into the offshore session such that the major US equity indices have climbed to new highs and ‘risk sensitive’ currencies like the NZD have outperformed.
NZD/JPY was propelled to fresh highs above 85.60, dragging the NZD/USD up to an overnight high of 0.8576.
In a strategy note yesterday, we outlined our view for further NZD/JPY appreciation this year. Our year-end NZD/JPY forecast is 89.00, with a ‘peak’ of 91.00 in March 2014. We also released our second quarter Markets Map.
In it, we note that while the global backdrop is expected to be slightly less NZD supportive in future, the strength of the domestic economy, a rising terms of trade, and a juicy interest rate differential should pick up the slack.
As a result, the NZD/USD is expected to remain on an uptrend this year. As we first suggested in early February, there is a risk we see 0.9000.
Today’s NZ PMI can afford to drop a couple of index points, from its beefy 56.3 level of February, and still be solid.
We’re watching in particular for drought impacts. Across the Tasman, all eyes will be on March employment data, for which our NAB colleagues forecast a 30k decline (market -7.5k).
A result along these lines would likely see NZD/AUD test resistance at 0.8150. For NZD/USD, positive momentum and the break above 0.8570 brings into view the 2011 0.8845 highs as the next target.
However, a daily RSI in ‘overbought’ territory suggests the risk of a short-term correction is growing.
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Majors
High-beta ‘commodity currencies’ (AUD, CAD, and NZD) outperformed overnight, as risk aversion continued to ease and equity markets notched up strong gains.
In contrast, the JPY continues to languish at the bottom of the currency performance rankings.
Following the positive lead from Asia, European and US equity markets have climbed 0.9-3.4%. Risk aversion indicators like the VIX are mostly lower, and commodity prices broadly flat.
Most market commentaries are effusing about the fact both the S&P500 and Dow Jones stock indices made fresh all-time highs overnight.
Upbeat risk sentiment has rapidly and predictably translated through to the outperformance of ‘risky’ currencies. Notably, the AUD/USD has broken above 1.0500 for the first time since January and looks to be setting its sights on 1.0600.
In contrast, the EUR/USD has struggled following more evidence of a stalling European economic recovery.
French industrial production managed to register an encouraging 0.7%m/m increase (0.2% expected), but the Spanish and Italian figures were downright awful (-8.5% y/y and -7.6%y/y).
After briefly testing 1.3120, the EUR/USD soon slid back to 1.3060.
Most of the night’s excitement came from the accidental early release of the March FOMC minutes. The minutes revealed the lively debate at the Fed about when exactly to begin winding down asset purchases.
A growing consensus appear to favour ‘tapering’ purchases from sometime later this year. But last Friday’s weak payrolls data may well have put the kibosh on these plans.
Overall, there was nothing to alter our view QE purchases will continue through to at least the end of the year.
Still, the marginally more hawkish tone of the minutes was seen as a good enough excuse for traders to restart the USD/JPY uptrend, although gains have again stalled just shy of 100.00.
10-year US Treasury yields have climbed 5bps to 1.8%.
Looking ahead, tonight’s speech from Fed ‘hawk’ Plosser is likely to be glossed over as traders look ahead to tomorrow night’s US retail sales figures. A flat outturn is expected.
As noted at the start of the week, 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 in the near-term.
However, ongoing investor interest to buy USD/JPY on dips will limit the extent of USD downside. Initial support on the USD index is seen at 82.30.
Event Calendar:
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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