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Sell-off in NZ$ surprising given strength of local data and fundamentals

Sell-off in NZ$ surprising given strength of local data and fundamentals

by Mike Jones

NZ Dollar

In relatively sleepy trade, the NZD saw out last week the same way it began – on the back foot. The NZD/USD slipped to a fresh two month low below 0.8090, before clawing its way back to a 0.8135 close.

The kiwi’s underperformance last week was somewhat surprising given the clear strengthening in the fundamentals. Local data remained almost unbelievably upbeat, and NZ-US 3-year swap differentials widened out to the highest level since November 2010 as OIS markets flirted with a January RBNZ rate hike (currently 37% priced).

Nevertheless, speculative selling amongst the NZD crosses (NZD/GBP in particular) won the day and dragged the NZD/USD lower.

For this week, local data will continue to be ignored as currency markets look to a swathe of central bank meetings (ECB, RBA, BoE, BoC) and Friday’s US employment report for direction. Investors are looking for a 183k increase in US employment. A result north of this likely to fan speculation of a December Fed taper and blow more wind into the USD’s sails.

Nevertheless, our broad NZD view remains intact. We still think another push to the topside is the bigger risk for the NZD/USD in coming weeks. That is, we’re sticking with our 0.8400 year-end forecast.

While a December Fed taper (or speculation thereof) is a risk, we don’t think it would be the death knell for the NZD/USD some are making it out to be. Just as important will be the Fed’s forward guidance and whether it manages to successfully push back on expectations for H2 2015 rate hikes.

This week’s local data schedule is dominated by the remaining partial indicators for Q3 GDP (due on 19th). Our forecast currently stands at a sturdy 1.0%q/q, with upside risk. This week’s commodities data may be of passing interest to the NZD. Tuesday brings the ANZ commodity price index, with the latest GDT dairy auction due on Wednesday morning. Along with Tuesday’s RBA decision, Australia reports retail sales, GDP, and trade figures this week.

For today, keep an eye out for Q3’s Overseas Trade Indices. We are looking for a 4% quarterly jump in merchandise terms of trade (12.3% y/y), to a 40-year high.

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Majors

Friday’s offshore trading session provided little to excite. The USD found a few friends late in the session, largely on the back of month-end positioning and profit-taking flows.

With most of the US still in holiday mode, volumes were light and most of the major currencies simply shuffled around inside their recent ranges. The outperformance of the GBP continued, and AUD and NZD bounced off their 0.8090 and 0.9060 lows. Meanwhile CAD, EUR, and NOK slumped to the bottom of the currency performance rankings.

Friday’s lacklustre trading was also driven by traders’ preference to keep their powder dry ahead of this week’s action-packed event calendar.

Central banks will be in focus with the RBA, Bank of Canada, Bank of England, and ECB due to meet. All are expected to keep policy unchanged, but the accompanying rhetoric could be interesting. Investors will be examining the RBA Statement for any signs its easing bias has been watered down again, or dropped.

For the CAD, key will be whether the BoC maintains its easing bias given the recent improvement in the data (including Friday’s solid 2.3%y/y expansion in September GDP). The BoE should be a non-event while Friday's stronger than expected Eurozone CPI (core 1% vs. 0.9% expected) means a follow-up ECB rate cut this week now looks very unlikely. The EUR is likely to maintain a positive bias as a result.

Heavyweight economic data will also come thick and fast. US GDP is out on Thursday with the market looking for a slight improvement to 3.1%q/q (annualised). The Eurozone, UK, and US all release November Flash PMIs (or the ISM survey in the case of the US), and there is a large swathe of data out of Australia.

However, Friday’s US non-farm payrolls will hog the limelight as the key indicator of whether the Federal Reserve is likely to begin tapering asset purchases at the 19 December FOMC meeting. We suspect a result around the 200k mark (183k currently expected) would lock in a December taper in the eyes of the market, bringing with it higher bond yields and a firmer USD. As usual, investors will look to Thursday’s ADP employment report as the curtain raiser to payrolls.

Other news:

*S&P cuts Netherlands’ sovereign rating to AA+ from AAA, outlook stable.

*US stocks benefit from positive reports from retailers on Black Friday sales - Amazon says Thanksgiving day online sales up 49% y/y.

*Moody's upgrades Greece's sovereign rating from Caa2 to C, with a stable outlook. *October German retail sales -0.8%m/m vs. +0.5% expected.

*The weekend’s Chinese PMI beats expectations by a fraction (51.4 vs. 51.1 expected).

All its research is available here.

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