Over enthusiastic markets may have bid the NZD:AUD too high; RBA beats RBNZ in talking down its currency

by Kymberly Martin

NZ Dollar

The NZD/USD has traded to either side of 0.8250 and 0.8280 over the past 24-hours, trading around 0.8250 at present.

Yesterday’s BNZ Performance of Services index confirmed a positive trend heading into Christmas. The November reading stood at 56.3, down 1.4 points from October, but illustrating a solid three months of expansion for the sector. Combined with last week’s PMI the index shows that employment is now ramping up.

It points to a sub-6% unemployment rate in Q4.

It is further justification for the market’s current pricing of OCR hikes from early next year and almost 200bps of hikes over the next two years. But this story is now well priced by the NZD.

The NZD/USD has continued to consolidate over the past 24-hours, well within recent ranges. It sits around 0.8250 currently.

Consolidation was also the main theme in NZD trading relative to its key European peers.

However, the NZD/AUD pushed on up to new five year highs above 0.9250. However, it was unable to hold onto the gains, returning to trade below 0.9220 this morning.

We continue to see positive momentum in the cross but equally recognise that it is looking stretched relative to fundamental valuations. Our short-term model suggests a ‘fair value’ range of 0.8500-0.8700.

Today, the NZ Government will release its Half Year Economic and Fiscal Update while the AU Government delivers its equivalent (Mid-Year Economic and Fiscal Outlook).

The NZ release is expected to confirm a surer path to surplus by 2014/2015, based on upgraded economic forecasts. However, this should not surprise the market.

In addition, all eyes will be on the RBA’s December minutes today. For the NZD/AUD cross, immediate support is seen at 0.9190, while resistance is eyed at the overnight highs around 0.9250.

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Majors

Currencies have traded fairly tight ranges over the past 24-hours, although the broad theme has been one of USD softness against its peers.

European equities were buoyant overnight as data showed Eurozone manufacturing activity at its highest level of expansion since mid-2011. The composite PMI for December (52.1 vs. 51.9 expected) was also at around a 30-month high. The Euro Stoxx 50 closed up almost 2%. The EUR/USD pushed up to 1.3800 early this morning, but was unable to hold onto the gain, returning to trade at 1.3750 currently.

The GBP/USD was also unable to hold onto its overnight gains. Pushing as high as 1.6350, it now sits at 1.6300. Tonight, a slew of UK pricing data will be released (CPI, PPI, retail prices, house prices) along with the CBI industry survey. UK CPI is expected to remain slightly above target, but a 0.2% rise in November, would keep the annual rate at 2.2% which is significantly down from June’s 2.9% peak. This will reduce the BoE’s inflation concerns as it continues to maintain highly accommodative policy.

The AUD/USD has consolidated further above 0.8920 over the past 24-hours. It trades around 0.8960 at present. Today, all eyes will be on the minutes from the RBA’s December meeting.

We expect they will provide similar conclusions to last month. i.e. that the RBA maintains optimism that interest rates are low enough to support activity (especially the housing sector), but it will express concern about the high AUD and uncertain outlook for non-mining investment.

The RBA has more success than the RBNZ in recent months in talking down the currency, as it faces a softening economic outlook. Crucial support for the AUD/USD remains at the August lows of 0.8850.

Tonight, the German ZEW economic survey will be released, along with the US CPI and current account balance.

All its research is available here.