By Raiko Shareef
NZ Dollar
The NZD continues to lose ground, off by 0.9% currently to be the worst-performing major currency. NZD/USD opens this morning near recent lows at 0.7720.
The sudden cooling of interest in NZD seems to have transcended any particular shift in the fundamental picture. Just last week, NZD was unstoppable, gaining even in the face of a strong USD upswing.
Our feel is that, as NZD stepped back from post-float highs (or thereabouts) against the crosses, investor interest waned. Recall the feverous eyeing of parity in NZD/AUD was a factor in keeping NZD/USD supported last week. Perhaps investors are finally beginning to take our point that the fundamentals for that cross suggest a rate closer to 0.90.
And don’t get us wrong, we are not objecting to the lower level of NZD/USD. Our model places its fair value at 0.7680 currently, which makes today’s level easier to swallow than Monday’s. Also, we are avowed NZD bears, and continue to hold a short position from 0.7918, with an initial target of 0.7460, expecting it to hit 0.70 by year-end.
Once again, the data calendar in NZ offers few clues for the day. Neither electronic card transactions nor QV house prices should trouble markets. We pick a 0.7680 – 0.7750 range today, with vulnerability at the lower end.
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Majors
Markets continue to take their cues from oil prices, which have fallen modestly relative to yesterday. But risk appetite perked up as the night’s heavier losses were pared. WTI had been 3.6% lower, but a bounce off $44 now has it just 1.0% weaker for the day. Brent is off by 2.8%, and dipped below WTI in price for the first time since mid-2013. The UAE’s energy minister said that it would expand production as planned, worsening a supply glut.
Equity indices rallied on oil’s mid-session bounce, but were also helped by positive earnings and ratings news. Alcoa set the early pace by surprising the market with an EPS of 33c vs 27c expected.
Apple and Amazon were upgraded by a prominent investment bank, spurring a rally in technology stocks. Amid the overwhelming pessimism in recent weeks, driven by oil, these positive pieces of news helped to lift the mood. The S&P 500 was as much as 1.3% higher before losing its puff, while the Euro Stoxx 50 closed 1.6% stronger.
An excellent set of second-tier US data helped support our long-held optimism on US recovery. The NFIB small business optimism survey rose from 98.1 to 100.4, beating an expected modest gain to 98.5. That puts the survey at an 8-year high, with strong details including compensation trends that are consistent with average hourly earnings at around 3.5% y/y, rather than the 1.7% in last week’s employment reports. This gives us some comfort that wage rises will eventually make their way out of the woodwork. Additionally, JOLTS job openings punched to a fresh 14-year high, hitting 4972 in November, up from 4830. Again, a much smaller gain was expected.
The USD had a decidedly mixed performance overnight. It gained strongly against the EUR, which continues to suffer from expectations of ECB policy action next week. EUR/USD is 0.6% weaker at 1.1770.
On the other hand, the USD lost further ground against the JPY, which looks set to close below 118.0 for the first time since mid-December’s equities rout. While we’ve ascribed the JPY’s recent appreciation primarily as a result of investor apprehension, my NAB colleague Nick Parsons points out that lower oil prices are a substantial net positive for the Japanese economy, by reducing its massive trade imbalance.
That said, we would also keep an eye on how the Bank of Japan views the disinflationary impact of lower oil prices. While most central banks are inclined to ‘look through’ the transitory impact on deflation, the BoJ is unlikely to be so sanguine. After all, anything that poses a risk to the Japanese public’s tenuous grasp on the concept of rising prices will be seen as a threat to the BoJ’s current mission statement. While we do not currently envisage any fresh easing, investors have been often been wrong-footed by the BoJ’s commitment to its task, and its ability to surprise.
In short, while a narrower trade deficit and heightened risk appetite might see some further consolidation in USD/JPY, we doubt the medium-term case for a weaker JPY has appreciably diminish. We remain conservatively bearish on the JPY, picking 123 by year-end.
Today sees a busier release calendar. We will be keeping an eye on eurozone industrial production and US retail sales. Fed speakers Kocherlakota and Plosser are due on the wires, representing the dovish and hawkish wings of the FOMC respectively.
Other news:
*China Dec. trade balance close to expectations at $49.6b, but exports and imports both stronger than expected.
*UK Dec. headline CPI falls to +0.5% vs +0.7% expected; GBP plunges but subsequently recovers.
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