Risk sentiment improves despite Ukraine, NZD rises, supported by China policy decisions

by Raiko Shareef

NZ Dollar

The NZD/USD made steady gains overnight, hand-in-hand with the AUD/USD, and sits 0.65% higher since yesterday morning at 0.8430.

Disappointing local data failed to stem the march upward.

Yesterday, Q4 building work fell by 1.0% m/m, against market expectations of a 3.1% gain. While we are treating this as a timing issue, given the strong upswing in construction, this will leave a hole in forecasters’ Q4 GDP calculations.

That said, we do not think this will affect the RBNZ’s policy outlook.

The continued recovery in risk sentiment is particularly evident in the NZD/JPY, which has gained 0.9% since yesterday morning. The cross currently sits at 86.30, its highest level since mid-January (and before that month’s emerging-market rout). A similar dynamic is apparent in NZD/CHF, which is up by 0.7%.

The curious thing about this break higher is that the NZD (and risk assets generally) was remarkably resilient to the deterioration in sentiment stemming from the standoff in Ukraine.

The subsequent ‘rebound’ has taken the NZD/USD to the brink of reaching its highest level since mid-October last year. From here, we see short-term resistance at 0.8480.

There are no local data due for release, so we look offshore for drivers.

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Majors

The USD was generally weaker overnight, with the GBP, AUD, and CAD outperforming.

The GBP jerked its way higher overnight, helped by services data that added to growing evidence that the UK is firmly on the path to recovery. The services PMI slipped only a fraction, to 58.2 from 58.3, against expectations for a sharper fall. The GBP/USD gained 0.3% to 1.6720. Tonight sees the Bank of England’s policy decision, where a no-change decision is widely expected.

Australia’s GDP growth, in Q4 2013, outperformed (recently lowered) market expectations. After the poor capex survey result last week, forecasters had lowered their expectations to 0.7% q/q. The data printed at 0.8% q/q, supported by strong export growth and solid household consumption. That said, business investment was poor. Of concern to the RBA, there was little evidence that the economy is transitioning to a more domestically-oriented growth impulse, as they would have hoped. Nevertheless, the AUD/USD rose steadily overnight, and is up by 0.4% this morning to 0.8980.

News from China’s National People’s Congress yesterday might have helped the AUD and NZD gains. The Congress released its official 2014 GDP target of 7.5%, and emphasised its focus on controlling pollution, deeper fiscal reform and supporting the idea of a stable CNY. The commitment to still-strong growth while implementing reform is positive for AUD and NZD.

The Bank of Canada held its policy rate unchanged at 1.0%, and retained a neutral bias. In recent meetings, Governor Poloz has been quite dovish, but both GDP and inflation have recently surprised on the strong side. The CAD has gained 0.6% against the USD since yesterday morning, to sit at 1.1050.

Tonight, the focus will be on the ECB, which could well choose to ease policy in some form or another. But our central expectation is that it will continue to talk a dovish line, without actually pulling a policy lever. Australian retail sales and US factory orders are also due.

Other news:
* Euro-zone composite PMI at 53.3 vs. 52.1 expected.
* Euro-zone retail sales at 1.6% m/m vs. 0.8% expected.
* US ADP private payrolls +139k vs. +155k expected.
* US ISM non-manufacturing 51.6 vs. 53.5 expected.

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