Kiwi under pressure from AUD and GBP as it 'looks stretched relative to fundamentals'

by Kymberly Martin

NZ Dollar

The NZD/USD traded a relatively tight 0.8220-0.8260 range overnight, sitting at the lower end of this range at present.

Yesterday’s domestic data, the December Performance of Services Index (57.5), confirmed robust growth in the sector. This complements last week’s PMI reading of 56.4.

The NZ economy ended last year on a strong note with positive momentum entering 2014.

But the drivers of the NZD are further afield at present, most notably the state of broad global risk appetite.

Risk appetite remains subdued as emerging market concerns persist. However, the NZD/USD was able to find a footing overnight along with its trans-Tasman peer.

Key near-term support for the NZD/USD remains at 0.8190 while resistance will likely be encountered approaching 0.8320.

While the NZD/JPY stabilised overnight, the NZD weakened against both the AUD and GBP.

The GBP now looks toward the release of UK Q4 GDP tonight which should confirm the UK economy is holding onto recovery. The NZD/GBP slipped from overnight highs above 0.5000, to 0.4960 this morning. Still, the crucial 0.5000 level has proved too tough a nut to convincingly crack on many previous occasions over the past 18 months. It will likely take further positive UK data surprises to achieve it at this juncture.

Meanwhile the NZD/AUD has pulled back from its highs to trade at 0.9420, as the AUD bounced overnight.

We continue to believe the NZD/AUD looks stretched relative to fundamentals. Our fundamental model suggests a current ‘fair value’ range of 0.8500-0.8700.

Today, with no domestic data scheduled, focus for the cross will be the release of the AU NAB business survey (1.30pm NZT).

------------------------------------------------------------------------------------------------------------------

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

------------------------------------------------------------------------------------------------------------------

Majors

The GBP has been the strongest performing currency over the past 24-hours, while the AUD has also rebounded relative to a fairly steady USD.

Much attention remained focused on emerging market concerns overnight. Our risk appetite index (scale 0-100%) dropped further to 47%. Since the start of the year, emerging market currencies are down across the board, with the worst performers being the Argentine Peso (-18.5%) and the Turkish Lira (-6.3%). Concerns focus on domestic specifics and slowing growth concerns plus increased fears these regions will face outflows as the US reduces its monetary stimulus. In this backdrop, equities and credit were once again under pressure. The Euro Stoxx 50 closed down 0.45% while the S&P500 is currently down 0.7%.

Developed market currencies appeared relatively resilient to the ongoing turmoil in their emerging market cousins. The USD ended the night where it started, around 80.45. However, it experienced some volatility intra-night at the hands of the EUR.

The EUR/USD spiked higher after the release of the German IFO survey of business. Both the current climate and expectations measures came in slightly above consensus. The data supports the view the German economy has started the year with reasonable momentum. The EUR/USD spiked above 1.3710, but later subsided to trade around 1.3680 this morning.

The GBP/USD was the strongest performer overnight. It recovered from Friday’s fall induced by comments from BoE Governor Carney, to trade at 1.6580 this morning. Tonight, all eyes will be on the UK as it releases its first reading of Q4 GDP. We, and consensus, expect GDP to have grown 0.7% in the quarter which will take annual growth to 2.8%. This would mark the first year where the UK economy has grown in every quarter since the financial crisis struck in 2007.

The AUD rebounded from its lowest level since July 2010 overnight. It trades at 0.8730 this morning. Today the NAB business survey for December will be released. The November report showed a fall in confidence from +6 to +5, while business confidence was still poor at -3. Consumer confidence has been losing ground in recent months, so that RBA will be hoping business confidence remains solid and translates into better investment spending in 2014.

Tonight, in addition to the UK GDP release, the US will deliver durable goods orders, consumer confidence and the Richmond Fed Manufacturing index. However, developments in emerging markets will likely determine broad sentiment in the coming 24-hours.

All its research is available here.