NZD/USD breaks out of range lower, falls against AUD; USD holds up well despite GDP data

by Raiko Shareef

NZ Dollar

The NZD continues its recent run of underperformance, falling against the USD, unlike most of its peers.

It has also plunged against the AUD.

NZD/USD flirted with 0.8450 in the early hours of this morning, having slipped through support at the 100-day moving average (0.8480).

It has since bounced marginally to 0.8470, but remains 0.3% lower compared to yesterday morning.

With the AUD looking peppy after yesterday’s AU capex report, the NZD/AUD collapsed by 1.0% overnight to 0.9110.

A further slide looks to have been prevented by support at the 200-day moving average (0.9100). A break below here makes a test of 0.9000 quite possible. Momentum seems on the side of this trade, with greater appetite to sell NZD against AUD than against USD.

This week’s break of the well-trod NZD/USD range is positive from the perspective of our strategy targets (0.79 by year-end). But at this point, we’d characterise ourselves as cautiously bearish.

Over recent months, the NZD/USD has been kept elevated (despite deteriorating fundamentals) by a combination of low US yields and ultra-low volatility. Those factors have not changed.

Last night, US 10-year yields dipped to an 11-month low of 2.40%, while NZD/USD volatility continues to plumb new (post-GFC) depths.

In short, the carry trade remains compelling.

Still, the bears have the upper hand. Our momentum model entered a short position on NZD/USD at 0.8527, and only a move to 0.8630 would cause this to break.

Watch today’s NZ building permit numbers for April. We’re picking a month-on-month fall, partly as last month’s punchy +8.3% m/m unwinds, and as the Easter/ANZAC holiday weighs. The market expects -3.5%. A worse result could see support at 0.8410 tested. We see initial resistance with 0.8500.

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Majors

The USD kept its cool despite a much-worse second reading of Q1 GDP, while the AUD outperformed as planned capital spending showed a glimmer of sunshine. Most currencies are marginally stronger against the USD overnight.

Local investors were bracing themselves for another gloomy AU capital expenditure report, as the peak of the mining investment boom appears well in the rear-view mirror.

The headlines of the Q1 report were pretty dismal.

For the March quarter, capex fell by a chunky 4.2%, worse than the 1.5% the market had expected. But the breakdown suggested that that business investment in plant equipment was on the up (mildly positive for AU GDP next week).

What’s more, the second estimate of the 2014/15 outlay was upgraded to $137 bln from expectations of up to around $130 bln. Investors latched onto these positives, and bid the AUD higher. There was a peek above 0.9300, but the air proved too thin above the 50-day moving average at 0.9290. The AUD retraced to that level, but remains up 0.6% for the day.

The talk of the town last night was how dreadful the second estimate of US Q1 GDP looked, at least at face value.

It was always going to be revised lower from the +0.1% q/q annualised, thanks the severe winter conditions. Analysts had expected something in the region of -0.5%. The actual -1.0% evoked a bit of sticker shock, but the initial USD dip was reversed when the market realised much of this could be blamed on inventory drawdowns. That large contribution means that the Q2 reading could see a bigger bounce as inventories are rebuilt.

And that would be consistent with the tone of data we’ve seen over the past two months. US data have improved, and if anything, surprised positively.

Last night, the number of people filing for unemployment benefits dropped to a lower level than expected. But on the other hand, pending home sales in April rose at a slower pace than anticipated.

Today, we’ll be most interested in the US core PCE inflation print. A 2% cut to Medicare payments made last year drops out of the equation, meaning a blip up to 1.4% (consensus), but possibly as high as 1.6%. This, after languishing between 1.1% and 1.2% for the past year.

A rise to 1.6% would take the Fed's favoured inflation measure to the top of its 1.4% to 1.6% forecast.

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