By Danica Hampton
After briefly dipping below 0.6350 last night, NZD/USD rebounded and is now sitting closer to 0.6450.
It was another topsy-turvy night for currencies. Early in the night, GBP weakness (after a UK Times article highlighted the risks to UK public finances) dragged most currencies lower against the USD. However, USD sentiment made a swift about-turn later in the session.
Stronger than expected US GDP data (it fell at an annualised pace of 5.5% in Q1 vs. 5.7% forecast) and solid gains on Wall Street reduced "˜safe-haven' demand for USD. Against a weaker USD, solid demand for growth sensitive currencies saw NZD/USD climb above 0.6450.
The key event today will be NZ's Q1 GDP release (10:45am). We're looking for a 0.7%q/q contraction (in line with market expectations). The partial indicators for the quarter, including net exports and oil/gas related activity, suggest some upside risks to our forecasts. However, top-down indicators, such as actual and expected activity readings from QSBO, point to something considerably worse than -0.7%.
Even if today's GDP surprises on the upside, we shouldn't forget that this will be the fifth consecutive quarter of negative GDP, and Q2 will possibly be another. The sense that NZ has weathered the global ructions in relatively good shape has provided a bit of support for the NZD over the past few months. However, we shouldn't ignore recent warnings from Governor Bollard and Prime Minister Key about the fragility of NZ's green shoots and that the recent tightening in financial conditions (thanks to a higher NZD and higher interest rates) is a threat to NZ's recovery.
The NZD/USD has spent the week muddling about in a 0.6250-0.6500 range. With little in the way of clear direction coming from the global backdrop or the USD, this choppy range trading looks likely to continue near-term. For today, we suspect bounces towards 0.6480 will attract sellers, while initial support is seen ahead of 0.6350.
It was another whippy night in global currency markets.
Early in the night, GBP weakness led most currencies lower. A UK Telegraph article highlighting the OECD's warning about UK public finances seemed to weigh on sentiment. Modest losses across European equities (most indices fell 0.5-1.0%) did little to help risk appetite. GBP/USD skidded from above 1.6450 to below 1.6250 and this quickly spilled across into more generalised USD strength. The USD Index flirted with the 81.00 highs seen earlier in the week and EUR/USD nudged below 1.3900.
Upbeat US data and a rebound in US equites saw USD sentiment turn swiftly. The USD Index fell sharply from just under 81.00 to nearly 80.20 and EUR/USD climbed from 1.3900 to above 1.4000.
US GDP fell at an annualised pace of just 5.5% in Q2, slightly better than the 5.7% forecast. While jobless claims pushed higher (continuing claims rose to 6,738,000 in the week ending June 14), strong gains in retail stocks bolstered Wall Street. The S&P500 is currently up 2%.
US government bond yields slipped lower last night following the successful auction of US$27b worth of 7-year Treasury bonds. Indirect bids totalled a massive 67.11%, more than double the average level (although market participants attribute this to a change in auction rules that force central banks to bid more aggressively). US 10-year government bond yields fell 14bps to 3.54%.
All in all, it's been another week of ping-pong in currency markets. Instead of risking whiplash, it's important to take a step back and realise that most of the major currencies have simply been churning about in familiar ranges. For the EUR/USD this week, the range has been 1.3800-1.4150 and for the USD Index it's been 79.50-81.00.
While we expect the USD to trend lower eventually, we're not convinced the USD is ready to take a step lower just yet. The recent Fed statement, which hosed down expectations of near-term rate hikes by saying that rates will remain at "exceptionally low" levels for "an extended period", has the potential to weigh on the USD. However, the recent wobbles seen across global equities and the problems still present in Europe make us wary.
We suspect the USD will continue chopping around in familiar ranges over the next few weeks. Looking at the USD Index, a break below the early June lows of 78.00 is needed to suggest the downtrend has become entrenched. On the topside, a break above 82.50 is needed to suggest the uptrend is gaining traction.
* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.
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