NZD/AUD cross stretching fundamental 'fair value' which remains in a 0.8600-0.8800 range, says BNZ

by Kymberley Martin

NZ Dollar

The NZD ended the week around 0.8540, a little below its Friday intra-night highs.

On Friday afternoon, ANZ consumer confidence data told a similar story to recent business confidence data; that is, it remains at elevated levels providing upside risk to our GDP forecasts.

However, this is hardly news to the NZD that traded fairly steadily throughout the day. On Friday night, in the backdrop of a marginally softer USD the NZD/USD climbed above 0.8560, but dropped back to end the week around 0.8540. It remains close to the level it originally fell to after the US FOMC announcement last Thursday morning.

Key NZD/USD resistance remains at 0.8640. Near-term support is eyed at 0.8500.

Moves on most crosses on Friday night were not notable, with the exception of a steady downward trend in the NZD/AUD. From around 0.9430 the NZD/AUD drifted down to end the week below 0.9400.

We continue to believe that recent ventures above 0.9500 should mark the top for the cross. Our forecasts see the NZD/AUD around current levels to slightly lower in the year ahead. We also continue to caution that current levels are stretching fundamental ‘fair value’ which remains in a 0.8600-0.8800 range.

It should be a fairly quiet start to the week domestically, with no scheduled data releases today or tomorrow.

The key data event today will be the March China HSBC flash PMI. As markets are highly focused on China risk they will not be prepared to absorb any disappointment. However, a better-than-expected result would support both the NZD and AUD independently, but likely result in a weaker NZD/AUD.

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Majors

In fairly quiet markets on Friday night, the AUD was the strongest performer. The USD was fairly range-bound.

Markets ended the week with a whimper rather than a bang. Equity markets on either side of the Atlantic provided modest returns either side of flat on Friday night. Our risk appetite index (scale 0-100%) remains stable around 62%.

There were few data releases of note. Comments from several Fed members gained attention in the wake of the upgrades by the FOMC the previous day. Bullard referenced Yellen’s comments that Fed rate hikes could begin around “6 months” after the end of ‘tapering’. He said this was in line with surveys.

By contrast, renowned dove Kocherlakota said he would have preferred to have seen a commitment to keep rates low until US unemployment falls below 5.5%. The USD took the comments in its stride. The USD index ended the week fractionally lower at 80.10.

The AUD was the strongest performer amongst its peers on Friday night. From 0.9060 the AUD/USD touched as high as 0.9100, before ending the week at 0.9080. Friday’s CFTC/IMM data showed reduced speculative short AUD positions ahead of the Fed’s meeting. Shorts were reduced to -24.5k from -40.9k, their lowest level since late October.

Today, a key driver of the AUD should be the release of the China HSBC flash manufacturing PMI for March. This slumped to 48.5 last month. The market is hopeful it can cling on at 48.7 this month. Anything above this expectation would likely be AUD supportive.

Elsewhere, currency trading was fairly uneventful on Friday night. It also has the potential to be a fairly muted start to the week. Aside from the China PMI data the only other key data scheduled for release are German and Eurozone manufacturing/services PMI.

All its research is available here.