Stronger USD and AUD push our cross rates lower; 'fair value' is a lot lower still

by Kymberly Martin

NZ Dollar

After the RBNZ left rates ‘on hold’ yesterday morning the NZD/USD showed a knee-jerk gap lower. It trades at 0.8140 this morning.

Yesterday the RBNZ left its Official Cash Rate unchanged as we expected. As the market had been pricing around a 35% chance of a 25bps hike ahead of the meeting, the currency’s immediate response was to gap lower when it was not delivered. This was understandable despite the fact the tone of the RBNZ’s statement was actually fairly hawkish.

We, along with the market now anticipate a hike in March.

Today, RBNZ Governor may elaborate on the Bank’s decision during a scheduled speech to the Canterbury Employer’s Chamber of Commerce (1pm NZT). Currently, the NZD/USD trades around 0.8140, at the lower end of the 0.8100-0.8400 range that has contained it for the past few months.

The NZD/AUD also gapped lower after the RBNZ announcement. It then maintained a steady one-way path lower overnight, in the face of a stronger AUD.

The NZD/AUD trades at 0.9270 this morning, its lowest level since mid-month.

We reiterate our model derived fundamental ‘fair value’ for the cross sits in a 0.8500-0.8700 range. However, near-term support is eyed just above 0.9200.

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Majors

Overnight, the USD was on the ascendancy. The AUD has outperformed most of its peers.

Overnight some of the more beleaguered emerging market currencies, such as TRY, ZAR, BRL managed a bit of a rebound from recent sharp falls. Our risk appetite index (scale 0-100%) has rebounded to 55%.

Equity markets put in a positive performance. The Euro Stoxx 50 closed up 0.50% while the S&P500 is currently up 1.3%.

Performance was also likely assisted by the release of a solid Q4 US GDP report (3.2%q/q ann). This growth was delivered despite the government shutdown in the quarter and on the back of a 4.1% gain in Q3.

It sends the message that as the massive fiscal drag declines, US economic growth is accelerating. The USD index climbed steadily from 80.60 to 81.10 this morning.

The EUR, GBP and JPY all weakened against the stronger USD. The EUR/USD trades back down at 1.3550 this morning. This was despite data that showed a decline in the German unemployment rate from 6.9% to 6.8%, and a rise in the European Commission’s Economic Sentiment Index.

It shows the region’s economic recovery is building momentum, albeit slowly. Support for the EUR/USD is now eyed at the mid-January lows around 1.3520.

The AUD bucked the trend of declines against the USD. Speculative short position in the AUD had recently returned to extreme levels. Now in the wake of some upside AU data surprises (CPI, NAB business survey), the currency seems to be finding its feet. It traded up from 0.8720 last night to sit around 0.8780 this morning.

Tonight, the EC unemployment rate and CPI estimates will be released along with US personal spending and the Chicago PMI.

All its research is available here.