Offshore speculative and leveraged players continue to show appetite for the higher yield and positive economic story of the NZ$

By Mike Jones

NZD

The NZD remains the darling of currency markets. The TWI notched up another post-float high last night and the NZD/USD is another ½ cent higher around 0.8640.

A dearth of news overnight hasn’t stopped the NZD from marching higher, as offshore speculative and leveraged players continue to show appetite for the higher yield and positive economic story of the NZD.

The success and demand for the DMO’s $2b 2020 NZ government bond is certainly illustrative of such. The book-build closed in excess of $2.8b.

NZ’s economic outperformance was highlighted by yesterday’s local data. March REINZ housing data showed annual house sales rising to 11%, with house price inflation rising to 8.1% at a national level.

In the case of Auckland, house prices are now 16% higher than a year ago. Across the Tasman, the news was much more dour. A 36k drop in employment saw the Aussie unemployment rate rise from 5.4% to 5.6%.

The contrasting fortunes of the antipodeans has seen NZ-AU 3-year swap differentials move back to almost par (from -25bps at the start of the week).

NZD/AUD has climbed another ½ cent to 0.8190 as a result. Our year-end forecast remains 0.8500.

Looking ahead, technical indicators suggest the NZD/USD is “overbought” and we may see some week end profit taking drag the NZD/USD back towards 0.8600 today.

Local food price data at 10:45am will likely be ignored (although keep an eye on US retail sales tonight). However, in the absence of any disruption to offshore risk sentiment, we expect the uptrend in the NZD/USD to continue.

The risk we first identified in early February of the NZD/USD hitting 0.9000 continues to grow. There is little topside resistance ahead of 2011’s 0.8850 post-float high.

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Majors

The USD’s woes continued overnight. With the exception of the JPY, all of the major currencies notched up gains against the greenback.

Financial markets were starved for news overnight. With little else going on, a well-received Italian bond auction got a bit more attention than usual.

Italy sold €4b of three-year bonds at 2.25%, with a bid-cover ratio of 1.4. This was a much better result than the last auction (2.48% with a bid-cover of 1.28), soothing fears the Italian political/economic malaise is restricting debt market access for the sovereign.

Having been drifting slowly higher all night, the EUR/USD leapt another ½ cent, to 1.3130, in the wake of the auction. However, the ease with which the EUR was able to rally perhaps says more about the market’s general distaste for the USD at the moment.

Supporting this notion is the fact that the GBP, NZD, CAD, and AUD were all rapidly dragged higher in the EUR’s wake. The AUD/USD managed to recoup all of its employment-related losses, briefly testing 1.0580.

A surprise fall in US jobless claims (346k vs. 360k expected) reinforced last night’s more upbeat mood, such that US equity markets remain on the front foot. The S&P500 is currently up 0.4%.

Looking ahead, we doubt tonight’s US retail sales data will do USD sentiment any favours. March sales are expected to flat-line, reflecting the impact of higher taxes and gas prices. Expect the greenback to remain heavy.

The latest Eurogroup/central bank governor talkfest also kicks off tonight. We doubt it will produce anything important for markets.

Other News:

*China’s FX reserves rise US$128b to US$3.44t in Q1, the biggest quarterly increase since Q2 of 2011. This suggests the PBOC is facing increasing capital inflows.

*French CPI comes out at 1%y/y in March (0.9% expected).

*German CPI 1.4%y/y as expected.

Event Calendar:

12 April: NZ food prices; EU Eurogroup meeting; US retail sales; US Fed’s Rosengren speaks.

All its research is available here.