By Mike Jones
NZD
Since our last report on Wednesday, the NZD has surged back to the top of the currency performance rankings.
From 0.8400 prior to the RBNZ meeting on Wednesday, the NZD/USD climbed steadily to a high of 0.8550 overnight, but is a little lower around 0.8500 this morning.
This puts the currency back inside our short-term valuation model’s 0.8450-0.8850 ‘fair-value’ range.
The ever-brighter glow of the kiwi’s relative growth and interest rate appeal has been largely responsible for the currency’s recent gains.
Not only are investors worried about a slowing pace of growth in the US and Europe, but Wednesday’s morning’s RBNZ statement reinforced to the market the relatively upbeat NZ outlook.
The Bank’s comment that growth “has picked up”, alongside it’s ”projection for inflation to gradually rise” has further dimmed the chances of RBNZ rate cuts in the eyes of the market.
This can be seen most clearly in the further gains in NZ-AU 3-year swap differentials, which are now back to almost flat. NZD/AUD has risen in tandem with these movements in interest rate spreads.
Indeed, at 0.8270, the cross is fast closing in on our 0.8300 ‘take profit’ recommendation for the long position we initiated at 0.7980.
A smart bounce in commodity prices has also helped underpin the NZD over the past few days.
Following the sharp declines of last week, oil prices have recovered almost all of their losses, while gold prices are almost 9% above last Monday’s US$1350/ounce lows.
This sets up a positive backdrop for next week’s dairy price auction. In addition, next Thursday’s ANZ commodity price index could be a whopper. We’re expecting a 7-8% monthly gain.
For today, keep an eye on the NZ trade balance at 10:45am (NZT). We’re looking for a monthly trade surplus of $298m, well south of the market consensus of $470m.
A result on our expectations may temper investors’ enthusiasm for the NZD/USD somewhat, but we doubt dips below 0.8400 will be sustained.
---------------------------------------------------------------------------------------------------------------------
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
------------------------------------------------------------------------------------------------------------------
Majors
The USD has spent most of the past two days sliding lower. This has been more about a reduction in the greenback’s ‘safe-haven’ appeal, than any change in relative fundamentals.
Indeed, general risk sentiment has continued to recover from last week’s brief rout. This is despite a string of lacklustre global economic data (most notably Wednesday night’s German IFO and US durable goods orders).
In terms of what has been propping up sentiment, we can look to a strong start to the US corporate earnings season (69.5% of companies have produced positive earnings surprises so far) and markets pricing with increased conviction an ECB rate cut being delivered next week.
Overnight, US stocks rose 0.5-0.8%, the VIX index (a proxy for risk aversion) slipped from above 13.5% to almost 13%, and the CRB global commodity price index climbed 1.5%.
A 2%+gain in both gold and oil prices led the commodity price gains, the latter has now recovered almost all of last week’s sharp declines.
Against this more optimistic backdrop, the risk sensitive currencies (NZD, CAD, AUD) have tended to lead the gains against the ‘safe-haven’ USD and JPY.
The EUR has made a few feeble attempts at the topside around 1.3100, but a growing consensus of analyst calls for an ECB rate cut has held the currency back inside a 1.2980-1.3080 range.
The star performer overnight has been the GBP, following a surprise 0.3%q/q expansion in Q1 UK GDP. The GBP/USD soared from 1.5300 to almost 1.5450 following the data.
While the actual surprise was not particularly large (0.1% consensus) the outsized GBP reaction likely reflects investors’ relief that the dreaded triple-dip recession was skirted.
The Bank of England extended its Funding for Lending (FLS) scheme by one year this week. Many on the BoE MPC have expressed a preference for credit easing rather than additional QE as the best way to stimulate the economy.
Given this, we expect interest rates and QE policies will be left unchanged in May, increasing the likelihood recent GBP gains will be sustained.
Tonight, all eyes will be on US GDP for Q1. The consensus expects a pickup in growth to 3.1% (annualised).
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.
The Bank of Japan also meets today but no policy changes are expected following the ‘shock and awe’ announcements earlier in the month.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.