Australian Q4 growth handily beats market expectations, boosting AUD. Fair-value reassessments see NZD fall and it may fall further

By Jason Wong

AUD and GBP head the currency leaderboard and there have been only modest changes elsewhere for the major currencies.

US equities have traded in a tight range and are currently flat, while European equities showed gains of 0.5-1%.

AUD is up 1.3% to 0.7270 after being buoyed by stronger than expected Q4 GDP data.  With upward revisions helping, the annual change of 3.0% was 0.5 percentage points above market expectations and the composition of growth was healthy.  The AUD has now recovered almost all of the losses it saw after getting hammered in the first two weeks of the year.

Helping the AUD were further gains in base metal and iron ore prices.  Iron ore is up 2% to $52.50, its highest level since October and up 37% from its December low.

NZD is fairly flat, remaining close to the middle of the 0.6550-0.6750 trading range it has exhibited over the last 4 weeks.  Thus, NZD/AUD is down 1.3% to 0.9120, and intraday it touched its low for the year of around 0.9115 reached at the end of January.

With NZ commodity prices significantly underperforming Australian commodity prices over the past month, the NZ-AU 2-year rate differential compressing by circa 20bps and a bigger fall in NZ vs Australian business confidence, our fair value model suggested that NZD/AUD should have fallen by 2.5 cents over February, while it actually rose.  We see the fall in the cross over the past 24 hours as representing a catch-up from the weaker fundamentals.  Current fair value is 0.8750 (down from over 0.90 as at the end of January) so there is scope for further falls over coming months.

GBP is up 0.8% to 1.4060.  Over the last few sessions, traders have ignored the weaker flow of economic data – there was another underwhelming UK construction PMI figure released overnight.   Instead, GBP is recovering after looking like it was oversold last week on Brexit fears.  We think GBP volatility is likely to remain over coming months, as Brexit fears wax and wane.  The options market continues to show implied volatility at heightened levels.

The only other data release of note was a slightly stronger than expected ADP employment figure.  This had little impact on the USD but suggests that US employment growth remains healthy.

The EUR and Yen trade are little changed against the USD.

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