Despite recent gains by the strengthening NZD, parity with the AUD 'unlikely' says BNZ; fair value nearer 92 AUc they say rather than current 96 AUc

By Kymberly Martin

NZ Dollar

The NZD sits a little lower at 0.7750 this morning.

After its early morning surge yesterday, following the latest GDT dairy auction, the NZD failed to maintain upward momentum. By midday yesterday it had given back its gains.

It has subsequently traded a fairly tight band between 0.7720 and 0.7760.

Yesterday’s December release of the ANZ commodity price index confirmed that downward pressure on NZ key commodities. The index fell 4.4% following a 1.6% fall the prior month.

There are no domestic data releases today. We see NZD/USD support at 0.7690 and resistance at 0.7810.

The NZD has strengthened on most of the crosses over the past 24-hours as its peers succumbed to broad US strength.

The NZD/AUD has pushed up to new highs around 0.9630 this morning.

At these levels, it is inevitable that talk of the NZD/AUD trading at parity will be reinvigorated. We believe this is unlikely.

Much of the diverging prospects on either side of the Tasman appear to already be in the price. The market already prices almost 50 bps of cuts from the RBA (aligned with our NAB colleagues’ view) while the RBNZ is seen to be ‘on hold’. Equally, the prospect for some rebound in NZ dairy prices appears to be factored in, while a soft outlook for AU commodity prices appears expected.

As it stands today our fundamental model for the NZD/AUD suggests a ‘fair value’ in the range of 0.9000-0.9200. This is not to suggest we expect immediate correction to these levels. Rather it serves to warn against extrapolating current momentum to a further push in the currency beyond relative fundamentals.

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Majors

The key theme overnight has been renewed USD strength. The JPY has been the weakest performer over the past 24-hours.

Markets were a little more settled overnight. The oil price is up 1.8% and equity markets have mostly rebounded. The Eurostoxxx50 closed up 0.6% while S&P500 is up 1.1%.

The EUR was on the back-foot for most of the night as German data was generally on the softer side of expectations, and Eurozone CPI came in below expectation. The December reading dipped to -0.2%y/y (-0.1% expected), only partly offset by a firmer core reading (0.8%y/y). The EUR/USD trades at 1.1820 this morning.

As the USD index rose from 91.80 to 92.20 (its highest level since November 2005), the JPY weakened. Demand for the ‘safe haven’ JPY diminished as risk sentiment was generally more stable overnight. The USD/JPY trades at 119.50 currently.

The GBP slumped along with the EUR overnight. The GBP/USD now trades at 1.5080, its lowest level since early July 2013. Tonight the Bank of England will meet but is not expected to take any action. The market prices only a 15% chance of a BoE hike by end-2015. Recall that earlier last year the market had priced the first BoE hike in early 2015.

After a bit of a slump yesterday morning the AUD/USD has subsequently traded a fairly tight range. Yesterday’s Dec AU Performance of Services PMI lifted to 47.5 (from 43.8) but showed the sector remains in contraction.

This morning (8am NZT) the Fed’s December Minutes will be released). Tonight, German factory orders, EU retail sales and confidence indicators will be released.

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