by Raiko Shareef
NZ Dollar
The grind lower continues. NZD/USD is 0.2% weaker this morning, holding just above 0.8410.
Yesterday’s eye-watering construction data was unable to provide the NZD any relief. Building work put in place in Q1 rose by 16% q/q, the fastest pace on record. No wonder, given the curiously soft reads at the end of last year combined with peppy leading indicators this year. This punchy report presents upside risk to forecasts of NZ’s Q1 GDP (due 19 June).
With commodity prices at the forefront of our minds, note that the ANZ Commodity Price Index fell a further 2.2% in May, bringing the cumulative decline since February to 5.8%. Really, though, the market was still mulling the continued slide in dairy prices as seen earlier yesterday morning.
A break below 0.8400 is proving to be a tough ask. An attempt to do so early this morning was rebuffed, and we suspect exporter demand lurking around that level, certainly keen to add cover with anything that begins with 0.8300. Following that, the next level of support is at the 200-day moving average (0.8360). On the topside, 0.8480 continues to provide initial resistance.
The more interesting story remains in NZDAUD, which finally broke through 0.9100 on the back of the stellar AU GDP print.
But consider the fundamental story. For one thing, while milk prices have fallen precipitously from recent peaks (-24%), iron ore has fallen by more (-34%). On that basis, NZD/AUD should be rising, not falling.
Separately, NZ-AU interest rate differentials do not support this move lower, having tracked sideways since March. This has had a 90%+ correlation with NZD/AUD over recent years. What’s more, we expect NZ-AU rate differentials to continue to widen in NZ’s favour, as the RBNZ continues to tighten monetary policy.
To be sure, the downside still beckons from a technical perspective, with 0.8980 the next stop. But we would simply point out that this sell-off goes against the grain of the fundamental picture. We anticipate a rebound toward 0.9300 in due course.
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Majors
Markets were fairly contained overnight, ahead of this week’s marquee risk events – the ECB’s policy meeting (tonight) and US non-farm payrolls (tomorrow night). The USD added to the gains it has seen this week, up 0.1% to just below 80.70.
Service-sector surveys might have had some bearing on the night’s (mild) currency movements. In Europe, the euro-zone services PMI unexpectedly slipped to 53.2, while the UK equivalent edged lower by less than expected to a still-strong 58.6. Across the pond, the US ISM non-manufacturing survey leapfrogged expectations to 56.3 in May. EUR/USD underperformed GBP/USD overnight (-0.2% vs 0.0% respectively).
The USD might have seen a larger gain had the ADP employment report not disappointed. ADP private sector employment rose by 179k against expectations of 210k. In the past, poor ADP prints have sent the market into tailspins of doubt regarding the non-farm payrolls read on Friday. It seems investors were more inclined to discount the miss overnight, having learnt that ADP tends to be a terrible leading indicator.
The AUD’s overall performance over the past 24 hours belies the fact that Australia saw an astounding pace of growth over the first quarter. AU Q1 GDP came in a +1.1% q/q vs +0.9% expected.
The initial surge in AUD to the cusp of 0.9300 was soon unwound, perhaps as markets realised that little of the growth impetus stemmed from domestic demand. Net exports contributed a full 1.4 percentage points to the print. Nonetheless, the AUD was one of few currencies to gain against the USD overnight, up 0.1% to 0.9280.
All eyes on the ECB tonight. We look for a package of policy measures to include 15bp rate cuts in all three rates (and the Deposit Rate to -0.15%), an extension to the existing long-term refinancing operations (LTRO), and a new LTRO that aims to incentivise banks to lend to small- and medium-sized businesses.
Other news:
*EZ Q1 GDP estimate unchanged at +0.2% q/q
*US trade balance -$47.2b vs -$40.9 exp.
*US Fed Beige Book notes modest to moderate growth in May as job market improved.
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