It was a quiet end to the week ahead of the long US weekend, with US equities flat, UST yields little changed and a flat USD. Economic data released had no impact on the market. They showed a modest upward revision to US Q1 GDP to a still-underwhelming annual rate of 1.2% and soft core durable goods orders.
The NZD capped off a good week, closing up 0.5% to just over 0.7060. For the week, the NZD was up around 2% against the USD, AUD, JPY and EUR and nearly 4% against GBP. There has been no good reason for the NZD’s significant outperformance over the week other than we have been somewhat puzzled by its underperformance over recent months, so a recovery of sorts has been well overdue.
Last week’s recovery saw some of the valuation gap against our short-term fair value estimate (around USD 0.75) close up. That model estimate has been nudged up recently by high levels of risk appetite (near a 3-year high) and the NZ commodity price index that feeds into it rising to a 2½-year high. It seems like the NZD played some catch up last week to these positive fundamental forces. For followers of technical analysis, the 0.71 mark represents an area of resistance.
The only notable price action on Friday was a slump in GBP, which fell by 1.1% to a few ticks over 1.28. NZD/GBP rose by 1.7% to 0.5520. It was a steady fall for GBP after the latest YouGov poll showed the lead of the Conservatives over Labour evaporating to just 5 percentage points, ahead of the 8 June election. The same poll showed consumer confidence falling to its lowest level since just after the Brexit referendum. While the polls weren’t particularly reliable for the last UK general election, the market took notice, with some worried about the possibility of a smaller Conservative party working majority or even a hung Parliament. A weak government would worsen the UK’s negotiating power with EU leaders over the terms of Brexit from an already pretty bad starting point.
WTI oil prices showed a modest 1.8% recovery to USD 49.80 after the previous day’s 4.8% plunge. This helped NOK and CAD show modest gains, but the AUD remained little changed around 0.7450. Sentiment wasn’t helped by a fourth consecutive daily fall in iron ore prices, taking them to USD 57.90 on the Qingdao measure, their lowest level since October. Prices fell by 7.6% for the week. The soft AUD saw NZD/AUD rise 0.7% to 0.9485, its highest close since early February and what we think is now a fairer level, after the inexplicable weakness over recent months.
EUR likely felt some spillover effect from the weaker GBP, which saw EUR/USD close the week a little softer around 1.1180. Yen strength was less understandable, with Japan inflation still showing no pulse, with annual core inflation remaining around zero. USD/JPY nevertheless fell by 0.5% to 111.30.
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