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Germany and Japan beat data expectations, pushing their currencies higher. NZD may get another bounce post Thursday's RBNZ review

Currencies
Germany and Japan beat data expectations, pushing their currencies higher. NZD may get another bounce post Thursday's RBNZ review

By Kymberly Martin

The USD was broadly weaker overnight as the EUR strengthened.

The NZD also made solid gains.

In the absence of key data releases overnight, a game of Chinese whispers played out in currency markets. Last evening, French officials were reported as saying that US President Obama had commented, at the G7, that the strong USD is a problem. This appeared to contribute to some early evening EUR strength at the expense of the USD.

However, later reports stated the White House denied that Obama had said the strong USD was a concern. Still, the EUR continued to track higher along with German bond yields.

The spread between US-German 10-year bonds, at 150 bps, is now well down from mid-March highs close to 190 bps. German industrial production data beat expectations overnight. The German trade balance was also larger than expected due to both stronger exports and weaker imports than anticipated. Exports may be benefitting from EUR weakness, though on the night, the EUR/USD has traded up from 1.1100 to around 1.1280.

The JPY has also strengthened over the last 24-hours. It benefitted from broad USD weakness overnight, but showed little discernable response to yesterday morning’s upward revision to the final reading of Japan Q1 GDP. The USD/JPY trades at 124.60 this morning, down from 125.60 last evening. Prime Minister Abe was quoted overnight as saying the weaker yen was leading to more visitors to Japan and supporting companies doing business overseas. We see the USD/JPY continuing to trade around the mid-120s through the remainder of the year.

NZD and AUD were also stronger overnight, though the NZD was the outperformer.

The NZD/USD has rebounded firmly from support at 0.7050, to trade at 0.7140 this morning.

While global trends are likely dominating the moves it could also reflect some market participants getting cold feet, on rate cut expectations, ahead of this Thursday’s RBNZ meeting. We continue to expect the NZD could be in for a further near-term bounce if the Bank keeps the OCR on hold, at 3.50%, this week (our central view).

However, we do not expect that any such move would prove sustainable.

A 2012 paper from the RBNZ argued that OCR ‘surprises’, in themselves, fail to have lasting effects on the NZD.

After the initial knee-jerk response, the currency’s direction will return to being driven by fundamental factors, such as commodity prices.

We continue to target NZD/USD at 0.7000 at year-end. We also continue to look for a near-term NZD/AUD bounce. Having entered a long NZD/AUD position at 0.9270, targeting 0.9610, we trade at 0.9280 this morning.

The NAB business confidence survey will be a key focus for the AUD today.


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Kymberly Martin is on the BNZ Research team. All its research is available here.

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