With the RBNZ’s previously-hawkish bias now gone, support for the NZD is softening

By Raiko Shareef

NZ Dollar

The NZD fell against the USD on Friday, in line with other major currencies after the Bank of Japan’s surprise announcement.

NZD/USD fell 0.7% to 0.7800, before a further tumble lower this morning to 0.7770. That came off the back of a weaker-than-expected China PMI outturn, release over the weekend.

Local data had little bearing on the NZD, though arguably played with the grain of its weakness.

Building permits in September fell by 12.2% m/m, far worse than the +1.0% expected, and outside the normal bounds of volatility. Worse still, it was the ex-apartments component that showed the weakness.

But everything was overshadowed by the Japanese policy announcement.

The resultant weakness in JPY saw NZD/JPY shoot higher, poking its head back above 88.0 for the first time since late September. Our forecasts currently have the cross at 85.0 by the end of the year, but it is clear we will need to adjust our USDJPY higher forecast as a result of Friday’s news. The cross would be marked higher as a result.

The NZD’s collapse in the early hours of Saturday morning exceeded that of the AUD’s, causing the NZD/AUD cross to briefly drop below 0.8850.

The weak China PMI had an outsized impact on AUD this morning, taking the cross back from the brink. 0.8850 remains the crucial level.

With the RBNZ’s previously-hawkish bias now absent, support here is softening.

There are no local releases today. We mark initial resistance at 0.7850, and support at 0.7710.

To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.

----------------------------------------------------------

Majors

It was an explosive end to the week in currency markets, with Japanese policymakers providing the catalyst. The USD stormed to fresh 2014-highs, driven by a 2.8% fall in the JPY. Most major currencies fell about 0.7% against the USD.

The Bank of Japan stunned markets by announcing an increase in the pace of its asset purchases. Governor Kuroda announced that the BoJ would expand its monetary base by ¥80tn ($719bn) a year from a previous ¥60-70tn target.

While the increase is significant, it was more the surprise that evoked such a strong response in markets. Only 3 of 32 analysts surveyed by Bloomberg expected the policy change, which defied months of coy commentary from BoJ officials, who tended to run the rather bland line that further easing would be undertaken if necessary. Those officials gave away little to suggest they thought the “if necessary” criteria had been satisfactorily met, until Friday.

In fact, Japan-watchers had their eye on another ball completely – the long-anticipated asset reallocation of the GPIF. A major re-weighting to favour equities (both foreign and domestic) and foreign bonds, to the detriment of domestic bonds, was widely mooted. This shift was confirmed on Friday, further electrifying the Japanese stock market, as well as sending the JPY spinning lower.

The Nikkei closed 4.8% higher for the day, while the JPY weakened from 109.30 to 112.70. The announcement also benefitted global equities, with the S&P 500 up 1.3% and the Euro Stoxx 50 up 2.6%.

The JPY’s weakness against the USD dragged the other majors lower, too. Over the weekend (and after the market’s close), China’s official manufacturing PMI fell unexpectedly from 51.1 to 50.8, against the improvement to 51.1 expected. That caused a 50pt drop in AUD at the open this morning to where it currently sits at 0.8750.

All its research is available here.