By Raiko Shareef
NZ Dollar
The NZD dropped along with its G10 peers against the USD on Friday, closing 0.7% lower at 0.7450.
In particular, NZD fell in sympathy with a much sharper drop in the AUD.
The collapse in NZD/USD over the past week (relative to its range-trading over the past three months) has taken it through some notable technical levels. On Friday, NZD/USD drifted below the 2012-low of 0.7460.
As such, we have hit the initial target for our short NZD/USD position (entered on 17 November at 0.7918). Back then, we noted the trade was a strategic one, with an eventual target of 0.70 (which is our end-2015 forecast).
At this point, we are wary that RBNZ rate cut expectations have built up quickly over the past month, and are at risk of being pulled back on Thursday. This would see NZD rebound modestly. The OCR Review’s language will be parsed closely for any hints that the RBNZ’s tightening bias is waning.
On the crosses, the JPY was inexplicably resilient to the broader USD rally on Friday night. This left NZD/JPY 1.3% lower at 87.6. We suspect the cross will remain clear of 85.0, with speculation abound that the BoJ might be forced to take further policy action in the face of slowing inflation.
Auckland and Australia are both on holiday today, but we expect global markets to remain lively. NZD will take its cues from offshore, with the local PSI unlikely to trouble it.
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Majors
The USD continued to streak higher on Friday night, in the wake of Thursday’s ECB meeting, which highlighted the stark divergence in policy between the US (tightening) and the rest (easing). The Bloomberg Dollar Spot Index closed 0.5% higher, now 2.5% higher than its last cyclical peak in early 2009.
The bottom of the G10 leader-board was packed. Understandable underperformance in the EUR (down 1.4% to 1.1200) dragged the other Europeans along for the ride. The AUD was a notable loser, too, losing its grip on the 0.80 handle, and closing 1.4% lower at 0.7910. Weakening metals prices likely contributed, with gold prices falling by 0.6% and the LMEX off by 2.4%.
The collapse in AUD came despite a relatively positive outturn in Chinese data. The HSBC flash PMI for January printed at 49.8 (49.5 expected, 49.6 previously).
The outperformance of the USD was all the more remarkable given that US data disappointed on Friday. The Markit US manufacturing PMI printed at 53.7 vs 54.0 exp, while existing home sale rose by 2.4% m/m vs +3.0% exp.
On the other hand, Europe’s PMI results were, on the whole, better than expected. The eurozone composite flash PMI beat expectations at 52.2 vs 51.7 exp.
As we write, the first exit polls from Greece’s election are coming through, and suggest that anti-euro Syriza may gain an outright majority. The market had anticipated that Syriza’s hard-line policies may be tempered by the need for a coalition partner. The outright victory will likely weigh on EUR today.
It is a very busy week in global markets. The FOMC meeting (Wed) will likely be the highlight, with investors watchful for any sign that US policymakers might waver on their course to higher interest rates. US Q4 GDP (Fri) will also garner strong interest, after Q3’s blinding +5.0% quarterly annualised gain.
Australia sees Q4 inflation results (Wed), which are expected to be soft, and will likely fuel speculation of RBA rate cuts in 2015. The NAB Business Survey (Tue) will also attract local interest.
Today, we look out for the BoJ meeting minutes, Germany’s IFO survey, and the Dallas Fed index.
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