Weaker Q2 NZ-GDP data expected to weigh on the NZD which is drifting lower after the US Fed announcements

By Kymberly Martin

NZ Dollar

The NZD/USD sits lower this morning, at 0.8120, after drifting downward overnight and suffering post-US FOMC volatility.

Yesterday morning’s balance of payments data showed the NZ current account deficit slimmed further to 2.5% of GDP.

However, we continue to expect deterioration toward 5.0% of GDP in 2015, which will be one of a number of factors that could weigh on the NZD over the longer-term.

But over the past 24-hours the fate of the NZD has been very much in the hands of USD. The NZD/USD was on a downward path but experienced a blip higher in the very early hours of this morning after a low-side US CPI reading.

However, greater volatility was seen after the US FOMC meeting (6am NZT). The NZD/USD plunged as the USD initially spiked higher.

The NZD/USD is currently struggling to find its balance around 0.8120. This is around is lowest trading level since early-February. Support is now seen at the February lows in the vicinity of 0.8050-0.8060.

The NZD also sits lower relative to its European peers. After drifting lower overnight, the NZD/GBP has broken below the crucial 0.5000 level to sit at 0.4980 this morning, its lowest level since February.

Meanwhile the NZD/AUD has been remarkably range-bound around the 0.9020 level.

This morning’s domestic focus will be the release of NZ 2Q GDP. This will be unlikely to provide anything to shore up the NZD.

We pick 0.5 %q/q, marginally below consensus (0.6%), but more importantly a little below the RBNZ’s published forecast (0.8%).

Even though the data is historic, and 3Q looks stronger, given current negative NZD momentum, the data could further weigh on the currency.

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Majors

Currency markets were relatively quiet until the US FOMC meeting spurred a bout of volatility early this morning. The NZD and AUD have underperformed over the past 24-hours.

In the build-up to the US FOMC meeting, US CPI data was released and prompted a short-lived dip in the USD. US August core CPI came in slightly below expectation (1.7%, vs. 1.9% expected) to be flat m/m.

However, the real excitement came after the US FOMC meeting. The USD index initially spiked higher (presumably in response to the higher FFR ‘dot points), but has subsequently given back some of its gain. It is wavering around 84.30 at present.

The result was an initial sharp fall in most of the other major currencies, which are now still finding their level. The EUR/USD initially fell below 1.2900 but now sits around 1.2920.

Earlier in the evening the GBP had taken a step down after the release of Bank of England minutes. The committee voted 7-2 to keep the bank rate at 0.5%. No further members moved into the camp calling for immediate rate hikes. The committee emphasised “accumulating weakness in the euro area” was the most significant development of the past month. The UK labour report also showed the UK is capable of creating plenty of jobs, while wage pressures remain moderate. The July unemployment rate declined to 6.2% from 6.4%. After the FOMC meeting the GBP/USD has taken another step down to sit around 1.6290 at present.

A toll was also taken on the JPY. After the FOMC meeting the USD/JPY has lurched higher, to above 108.00 for the first time since September 2009. The Fed’s projected path toward ‘normalising’ rates contrasts starkly with the BoJ’s continued monetary policy easing.

The AUD was also jolted around in the early hours of this morning, although it had been on a generally subsiding path overnight. The AUD/USD sits around 0.9000 currently. This morning the market will continue to digest the Fed’s message. Then the RBA will release its 3Q Bulletin and monthly fx transactions data.

Elsewhere the BoJ Governor, Kuroda, is scheduled to speak in Tokyo. UK retail sales data will be released tonight along with US housing starts and the US Philadelphia Fed business survey.

But most attention may be garnered by the Scottish Independence Referendum. A vote against independence could see a knee-jerk relief rally from the GBP, as a period of prolonged uncertainty would be curtailed.

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