By Mike Jones
NZD
The NZD/USD stood its ground better than most against a firmer USD on Friday night. A sizeable bounce in NZD/JPY certainly helped. Still, this wasn’t enough to prevent a 2% decline in the NZD/USD over the week (0.8590 to 0.8420).
The USD was the big winner last week, as worries about the global growth picture saw investors clamber back into ‘safe-haven’ positions.
Not only did US data reveal the US economy hitting a soft patch in March, but the Chinese economic ‘rebound’ continued to underwhelm.
Signs of flagging global demand saw commodity prices (particularly metals prices) fall sharply, taking a particularly heavy toll on ‘commodity-linked’ currencies like the NZD and AUD.
Looking ahead, the relative strength of this week’s slug of global economic data will be important for the evolution of investors’ global growth perceptions and risk appetite.
European and Chinese Flash PMIs, Q1 GDP figures out of the UK and US, and the German IFO are shaping up as the key data to watch in this respect.
Market positioning means the NZD is particularly vulnerable to any downside surprises on global growth and risk aversion flows. Our momentum model suggests momentum accounts are long NZD, with 0.8378 being the level at which these positions will be ditched.
Meanwhile, IMM data (for the week ending 16 April) shows the speculative community built up net NZD long positions to the highest levels on record last week. Admittedly, net longs probably came off their highs in the latter half of last week, but the point remains that NZD positioning is at ‘extreme’ levels.
There are two key events dominating the NZ/AU data calendars this week. Australian CPI will be released on Wednesday, with the market looking for 0.7%q/q. Our NAB colleagues expect a low 0.4% but doubt this would be low enough to get the market excited about an RBA rate cut in May. Nonetheless, it would pose some downside risks for the AUD/USD.
In NZ, we and everyone else expect the RBNZ to leave the OCR at 2.5% on Wednesday (changed timing for ANZAC day).
As for the NZD reaction, this will depend on how the accompanying statement balances signs of building economic momentum and house price heat against a currency that continues to exceed RBNZ expectations. Governor Wheeler might be tempted to have another crack at jawboning the NZD but, as with the March MPS, this won’t have any lasting impact on the currency.
All up, the balance of risks favour the downside for the NZD/USD this week. A break below key support at the 0.8360 200-day m.a would pave the way for a deeper correction towards 0.8250. Bounces should be limited to initial resistance at 0.8450.
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Majors
Light volumes and a dearth of economic data kept currency markets volatile and skittish on Friday night. The JPY remained the focus of traders’ attention; another strop higher in USD/JPY kept the USD firm despite a mostly positive night for risk appetite.
As expected, Japan’s easing policies didn’t come in for any special attention at the G20 meeting. In fact, it was Europe’s slow growth and debt woes that most policy makers (particularly the US) were concerned with.
With the G20 effectively flashing the green light for further JPY weakness, traders were more than happy to oblige.
From the low 98’s, USD/JPY soared to 99.50 and has opened this morning on the front foot. Expect an attempt on 100.00 at some point this week (there is rumoured optionality around this level).
Concerns about a stalling in global growth flashed back onto currency markets’ radar last week. The week ahead offers plenty to influence global growth sentiment.
Most notably, Tuesday night’s European Flash PMIs and Wednesday’s German IFO will provide a timely gauge on the state of Europe’s manufacturing base. Broadly speaking, markets expect a steady outcome.
However, unexpected weakness could have an outsized negative impact on the EUR given chatter about possible ECB easing is starting to ramp up. We expect European growth concerns to drive EUR/USD to 1.2700 by end-June.
Amongst this week’s US data, Friday’s advance Q1 GDP estimate will be the most important. The consensus expects a pickup in growth to 3.1% (annualised), implying a quarterly expansion of over 0.7%. A solid result along these lines has the potential to support US bond yields and the USD, particularly in the context of further deterioration in European data.
Elsewhere, the UK also reports Q1 GDP on Thursday. We look for an above-consensus 0.2%q/q (consensus 0.1%). Bear in mind that a negative outturn would confirm a ‘triple-dip’ recession for the UK and take a gouge out of the GBP.
The Bank of Japan meets on Friday but no policy changes are expected following the ‘shock and awe’ announcements earlier in the month. The BoJ will likely push back the forecast horizon to 2015 and officially forecast 2% inflation. While expected, this could further fan the USD/JPY uptrend.
Other news:
*PBOC Governor Zhou says “We need to sacrifice short-term growth for the purposes of reforms and structural adjustments.”
*Bloomberg & the FT report that the BoE will announce an extension to the FLS scheme as early as this week.
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