NZD subject to international views on risk; the major currency weak-point is the NZD:AUD cross

by Kymberly Martin

NZ Dollar

The NZD/USD sits a little lower, at 0.8080, this morning. With its epicentre on emerging markets, risk aversion continued to impact on markets on Friday night. The ‘risk sensitive’ NZD/USD was an obvious casualty.

Earlier in the day, NZ trade data showed exports surging. Exports were shown growing 16% while imports grew 18.8%, yet another indicator of very strong growth momentum.

Later in the day, Governor Wheeler’s speech provided little new information, but confirmed a 200bps hiking cycle will soon be starting. However, the NZD/USD dipped following the speech. The market perhaps latched onto his scenario analysis showing what would be the interest rate response to a sharp fall in the TWI.

Overnight, downward momentum in the NZD/USD continued as equities, and ‘risky’ assets generally, struggled.

The NZD/USD sits around 0.8080 currently, at its late November lows. A convincing break below this level would open the way for a pullback toward 0.8000 and beyond.

We suspect domestic fundamentals this week (e.g. Wednesday’s labour report) will certainly suggest a nudge in the NZD/USD in the opposite direction.

However, global risk appetite may have the final say on NZD/USD direction near-term. In this regard, the release of a solid official China manufacturing PMI over the weekend (50.5 as expected), may help soothe some China growth fears.

The NZD also sits a little lower on most crosses. Relative to the GBP the NZD sits at its lowest level since June 2012, at 0.4910. The NZD/AUD has continued to decline to trade at 0.9230. We see a band of support for the cross in the 0.9150-0.9170 window.

However, we reiterate our model derived fundamental ‘fair value’ for the cross sits in a 0.8500-0.8700 range.

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Majors

As risk aversion once again dominated markets, the JPY outperformed while the NZD underperformed.

While some emerging market currencies continued to stabilise on Friday a general tone of risk aversion prevailed. Our risk appetite index (scale 0-100%) once again dipped below 50%, to 47%.

Equities on both sides of the Atlantic posted negative returns (Euro Stoxx 50, -0.4%, S&P500, -0.6%).

The USD index found favour in this backdrop. It was also supported by solid US data releases, and potentially aided by month-end rebalancing. The Chicago PMI just beat expectations, rising to 59.6 from 59.1. The final University of Michigan consumer sentiment index rose to 81.2 from the 80.4 preliminary reading (81.0 expected). The USD index trades around 81.30 this morning.

However, the key beneficiary of heightened risk aversion was the ‘safe haven’ JPY. The USD/JPY declined from around 102.80 to sit just below 102.00 currently.

Elsewhere currencies were generally softer relative to the USD. Perhaps the most significant data point on Friday was Eurozone CPI. It fell to 0.7%y/y from 0.8% (0.9% expected).

Combined with last Thursday’s soft German CPI report, the data has some now anticipating further easing action from the ECB this Thursday.

We think the Bank would wait until March when new staff economic projections are available. But President Draghi’s press conference will be interesting this week, either way. Anticipation of further easing may maintain downward pressure on the EUR/USD, which sits around 1.3490 this morning.

As the week opens, the AUD/USD sits around 0.8740. Today, there is a swathe of 2nd tier AU data to be released ahead of tomorrow’s RBA meeting. The central bank is widely expected to remain on hold but maintain its gentle easing bias.

Tonight, EC PMI manufacturing data will be released along with the US ISM equivalent. Attention will also likely remain on emerging market developments as the determinant of overall risk sentiment.

All its research is available here.