Despite media pounce on lack of NZ surplus, financial markets hardly blinked; NZ looks good to nervous global investors

By Raiko Shareef

NZ Dollar

The NZD is moderately stronger this morning, benefitting from some rather violent USD selling across the board last night.

NZD/USD is 0.6% higher at just below 0.7790.

The dairy auction overnight saw a mild bounce in prices, with the GDT Index rising by 2.4%.

This makes a very small dent in the declines we have seen over 2014. We wouldn’t attribute much (if any) of the NZD’s strength overnight to this result.

Yesterday’s HYEFU came in largely as the market had anticipated. While news media were quick to pounce on the Government’s failure to deliver a surplus, markets hardly blinked.

The fact remains that NZ’s fiscal position is the subject of envy across the Tasman, as well as across the developed world.

Today, the Q3 current account balance is the only local release, where we expect some modest worsening as dairy price declines start to feed into national statistics. We expect the current account deficit to widen to 2.8%, from 2.5% in Q2. This should not have much impact on the NZD.

We expect rather cautious trading to prevail ahead of the FOMC tomorrow morning. We pick a 0.7760 – 0.7820 range for today.

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Majors

Another wild night, though equities managed to post some decent gains. The Euro Stoxx 50 closed 2.3% higher with energy shares leading the way, after crude oil prices looked to post a positive gain for the day. They have since fallen back into the red, and the S&P 500 has pared its gains in tandem, sitting flat at the time of writing.

In currency markets, the USD was pushed back rather violently, though with some notable exceptions. The Bloomberg Dollar Spot Index is 0.4% weaker.

The mood was still very negative early into the trading day, with Russia front of mind. The 11% collapse in RUB on Tuesday prompted the central bank to slam its policy rate higher from 10.5% to 17.0%. This attempt to draw line under the RUB failed nearly as soon as the ink had dried. The currency is another 9% weaker today against the USD, and that’s after it pared losses. At one point, it had lost nearly 27% relative to the day’s opening price.

Softer Chinese data would have added to fears about a malaise in global demand. The flash reading of HSBC’s China PMI dropped further into ‘contractionary’ territory than expected, printing at 49.5 in December after sitting on the break-even 50.0 number in November.

Such conditions were bound to make investors nervous. In FX, that was expressed by some hurried and messy unwinding of the crowded consensus trade of being long USD. The proclivity to sell USD no matter what was best seen in GBP, which tops the G10 leader-board despite a very soft inflation print. Core CPI inflation (i.e. excluding energy prices) fell to +1.2% y/y, having been expected to remain at +1.5%. But the knee-jerk move lower in GBP was swiftly reversed, and instead GBP stands 0.7% stronger for the day at 1.5750.

In contrast, European data was generally supportive of EUR’s lurch higher. Germany saw big positive surprises in its flash manufacturing PMI (+51.2 vs +50.3E) and ZEW survey (+10.0 vs +5.0E). EUR broke above 1.2550 before paring some of its gains to sit just above 1.2500.

Tonight, it is all about the FOMC’s policy meeting. The statement will be released at 8am NZT tomorrow, with a press conference from Fed Chair Yellen soon after. See the Fixed Interest section for what changes we are expecting. From an FX perspective, we are wary that the long USD community might consolidate further, even if the Fed simply delivers what the market expects.

All its research is available here.