Stevens says AU economy will improve, downgrades concerns about the AUD, expects non-mineral exports to rise

by Kymberly Martin

NZ Dollar

The NZD pushed a little higher overnight to trade around 0.8600 this morning.

Yesterday’s domestic data (LVR survey and mortgage approvals) provided no real surprises. The RBNZ published its February ‘high’ (>80%) LVR survey for the banking sector. These loans increased a little bit, to 4.2% of total, from the 3.8% low of January (after exemptions), but is still well below the 10% ‘speed-limit’ put in place by the RBNZ.

Mortgage approvals for the week ended 21 March, were 93% of the level of the comparable week last year, pre the LVR restriction.

The NZD headed gently higher from early yesterday afternoon, touching intra-night highs around 0.8620. It trades close to 0.8600 currently. Resistance remains at last week’s pre-US FOMC meeting highs, around 0.8640. Near-term we see NZD/USD support at 0.8540.

Overnight the NZD/EUR pushed higher to 0.6240 in the backdrop of a soft EUR. This cross now trades at its highest level since early November when it spiked to 0.6280.

Meanwhile the NZD/AUD weakened overnight. It initially slipped during comments by RBA Governor Stevens yesterday afternoon. The downward drift then continued overnight to take the cross to 0.9320 this morning.

Today will bring the domestic data highlight of the week, the NZ trade balance. We expect this to deliver more good news as booming primary product prices and strong production continue to inflate export returns. The 14% y/y gain we have pencilled in for exports, along with a 4% y/y lift in imports, would result in a monthly trade surplus of $839m. This would easily be a record February trade surplus in dollar terms and the highest as a share of exports in more than 20 years. This should help support the NZD today.

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Majors

The USD index sits slightly higher this morning. European currencies generally underperformed while the AUD was the strongest performer overnight.

Overnight, our risk appetite index (scale 0-100%) held on at 66% as European equities posted a further rebound. The Euro Stoxx 50 closed up 1.1%, while the S&P500 is currently flat. Tensions surrounding the Ukraine continue to simmer. However, the major headline overnight was of the IMF nearing the end of its talks with the Ukraine for a bailout of up to US$20b.

The AUD extended its recent outperformance overnight.

In Governor Steven’s comments in Hong Kong yesterday he said he is optimistic that the Australian economy will continue to improve, strengthening in late 2014 and pick up further in 2015. While resource investment spending will be easing, exports and other parts of private demand will take up most of the slack.

He did not take a direct swipe at the AUD but the currency came in for mention. He believes the AUD is still above its long-term equilibrium level, while not accusing the currency of near-term ‘overvaluation’.

Rather he believes the direction of the AUD from here is dependent on fundamentals. He believes it would be surprising if the AUD doesn’t decline with the expected drop in the terms of trade. The AUD seemed little concerned about these longer-term projections and happily rose from below 0.9160 to sit above 0.9220 this morning.

Overnight, the GBP bucked the trend of softness shown by most of its European peers. The GBP/USD climbed from intra-night lows around 1.6510 to trade close to 1.6580 this morning.

Tonight, UK retail sales will be released along with the latest reading of US Q4 GDP and US pending home sales.

All its research is available here.