Local economy strength, OCR hike threat, high commodity prices all see NZD holding higher levels than expected

by Kymberly Martin

NZ Dollar

The NZD/USD has started the year on the front foot. It was the strongest performer of its peers on Friday night. It trades around 0.8280 this morning.

Despite a trading range for the year that spanned 0.7700 to 0.8600, the NZD/USD ended 2013 around 0.5% from where it started, just above 0.8200.

Its performance confounded many commentators who had previously argued that signs the US Fed was reducing its stimulus would undermine the NZD/USD.

With irrefutable strength in the domestic economy, and an imminent NZ OCR hiking cycle ahead, we believe those fears are premature.

Ultimately, we do believe that as US growth picks up to narrow the differential with NZ, the NZD/USD will decline.

A pullback in NZ commodity prices and terms of trade will likely also contribute.

However, that is likely a story for later this year. We see the NZD/USD trading above 0.8000 in H1, with an end 2014 target of 0.7700.

The NZD has also started the year on the front-foot relative to its European peers. At 0.6100 the NZD/EUR trades at its highest level since late Nov.

Meanwhile, the 0.5000 level remains the glass floor for the NZD/GBP. It has failed yet again to maintain a probe below this level, at year-end, trading at 0.5050 currently.

It will be a quiet holiday-induced week on the NZ data front. Only QV house prices and building permits are scheduled for release.

The fate of the NZD for the week may therefore lie offshore, with key event risk lying with Friday night’s US nonfarm payrolls release.

For the week, we see NZD/USD support in the 0.8120-0.8140 window. Resistance is eyed at 0.8330.

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Majors

The USD index strengthened against a weaker EUR on Friday, a trend that has been in place since the start of the year. The NZD was the key outperformer.

Since the start of the year our global risk appetite index (scale 0-100%) has remained fairly steady around 67%. Equity markets are generally modestly lower. Data at the end of last week showed the Chinese PMI remained in expansion (official measure, 51.0, HSBC, 50.5). The Chinese non-manufacturing PMI slipped from 56.0 to 54.6 but generally garners less response from markets.

The USD index has been on the ascendancy since the start of the year, though with few fundamental catalysts. At the end of last week a number of US FOMC members were speakers at a conference in Philadelphia. However comments provided no convincing new information on either the pace of ‘tapering’ or the potential start to the ‘tightening’ process. The USD index sits around 80.80 this morning, against a weaker EUR. The EUR/USD trades around 1.3590, its lowest level since early Dec. A focus for the currency this week will be the ECB meeting on Thursday, although rates are expected to remain unchanged.

The GBP/USD found resistance around 1.6600 at the turn of the year, pulling back to sit at 1.6410 currently. On Friday night, data showed UK house price appreciation accelerating to 8.4%y/y. This is likely buoyed by still very accommodative monetary policy. This Friday, the Bank of England will meet. However, consensus expects no change to either its cash rate (0.5%) or its asset purchase target.

In recent trading sessions the USD/JPY has been consolidating its gains around the 105.00 level, its highest level since Oct 2008. We expect further strength in the year ahead as the US Fed gradually reduces its monetary stimulus while the BoJ continues to stimulate the economy in an attempt to return inflation to its 2% target. Data released in the last week of Dec showed Japanese core CPI at 0.6%y/y, its highest level since mid-1998.

The AUD/USD has spent the past few weeks bumping along recent lows below 0.8900. On Friday it pushed up a little to trade at 0.8950 this morning. This week the AU trade balance will be released (Tuesday) and building approvals (Thursday). However, most market attention will likely be given to AU retails sales data to be released on the same day.

Despite central bank meetings this week, the market’s main focus will be Friday’s US nonfarm payrolls data. A 195k release (previous 203k) is expected. Any surprise around this number could influence the market’s expectation for the pace of Fed ‘tapering’.

All its research is available here.