NZD ended the week on a positive note, alongside other commodity currencies, helped along by an underwhelming US GDP report that also saw US treasury yields retreat

The NZD ended the week on a positive note, alongside other commodity currencies, helped along by an underwhelming US GDP report that also saw US treasury yields retreat.

The market’s focus Friday night was the US Q1 GDP report.  The headline figure was stronger than expected at an annualised 3.2%, triggering more USD strength and a rise in US rates, but as the detail of the report was released, the market reversed course.  A building of inventories and strong net exports drove the headline figure, suggesting a weak underbelly to the result, with domestic real final sales rising at just a 1.3% annual rate.  Furthermore, the PCE deflator came in at a weaker than expected 1.3 y/y%, moving further away from the Fed’s 2% inflation target.

The market took the view that the data added to the chance of the Fed cutting rates this year, with almost a full 25bps cut priced by the end of the year.  Treasury rates fell across the curve, with the 2-year rate down 5bps to 2.28% and the 10-year rate down 3bps to 2.50%.  The impact on the USD was modest, with the indices we track down about 0.2%, leaving it close to its high point for the year.

Lower rates help fuel the equity market, with the S&P500 up 0.5%, making a fresh record (closing) high.  Within the mix energy stocks were lower as oil prices plunged 3% after President Trump said that he had called OPEC and demanded that they bring down oil prices. The fall in prices erased the strong gains seen over the past week or so.  WTI crude ended the week around USD63 while Brent crude ended the week around USD72.

Higher risk appetite and a slightly softer USD supported the NZD, seeing it close the week around 0.6660, making it only down slightly for the week, and well up from the ANZAC Day low of 0.6580. Against our fair value model estimate, which sits around 0.69, the NZD has been looking a little oversold, albeit not significantly so, as speculators have been increasing short-positions in the NZD since the RBNZ’s dovish pivot in late-March.  CFTC data show the number of net NZD short positions rising to their highest level since mid-December.

Through local trading hours, the NZD was supported after RBNZ Governor Orr gave another media interview, this time to the NBR. On the economy he sounded upbeat, saying he wasn’t particularly worried about the recent slowdown in growth, as the labour market was in a good position, the fiscal position was strong, monetary policy still had “petrol in the tank”, NZ’s terms of trade were in a good space, and the exchange rate was behaving well. “In a relative sense, compared to many parts of the world, we're in a pretty good spot”, he added.  Consumer confidence rose to a 13-month high and the trade surplus in March was much stronger than expected, doing the NZD no harm.  The OIS market lost some conviction that the RBNZ would cut rates in May (down to a 54% chance of a 25bps cut), with rates nudging higher across the curve.

The AUD was slightly better bid during Friday’s session, seeing it close the week about 0.7040 and proving once again that the 0.70 level remains a strong support base, with moves below that mark fleeting over the past six months.  NZD/AUD continued along its upward trend for the week and closed near 0.9460. Despite the plunge in oil prices, CAD held its ground, with the soft US GDP report being the dominating factor, seeing USD/CAD down 0.2% to 1.3455. EUR and GBP made small gains, while JPY was flat for the session. The outperformance of the NZD saw it modestly higher on all the crosses.

In other news, President Xi addressed some 40 world leaders at the Belt and Road forum in Beijing and, as reported by Bloomberg, it seemed well directed at President Trump who didn’t attend.  Xi spent a large portion of his speech pledging to address state subsidies, protect intellectual property rights, allow foreign investment in more sectors and avoid competitive devaluation of the yuan – these being consistent with US demands in current trade negotiations, supporting the case that some agreement will soon be reached.

The day ahead should be fairly quiet, with the US data releases on the calendar simply providing more colour on the monthly breakdown of data that made up the GDP release.  The focus for the week will be the FOMC meeting Thursday morning NZ time, and the US employment report at the end of the week. In NZ, key labour market data mid-week could have some bearing on the RBNZ’s policy decision next week.

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