Opinion: No fundemental reason to chase NZ$ higher against US$
1st May 09, 9:12am
By Danica Hampton The RBNZ cut rates 50bps to 2.50% at yesterday's OCR Review. The accompanying statement left the door open for further interest rate cuts and noted the rates would remain at low levels until the latter part of 2010. In reaction, both NZ interest rates and the NZD dived. The 2-year swap rate dropped about 30bps to 3.36% and NZD/USD fell from around 0.5740 to below 0.5650. However, the NZD/USD weakness didn't persist through the overnight session. Better than expected Japanese industrial production and strong gains across Asian and European equities bolstered risk appetite and demand for growth sensitive currencies like NZD. Anticipation of strong month-end demand for NZD (related to currency hedge re-balancing after global equities finished the month up about 10%) also provided support. The net result saw NZD/USD push up towards 0.5750. But the NZD/USD backed off its highs through the NY session as US equities remained flat (as investors digested Chrysler's bankruptcy filing) and the much anticipated month-end demand wasn't quite as strong as traders had expected. So where to next for NZD/USD? We continue to think the market is underestimating the scope for further monetary policy easing and remain comfortable with our view of the OCR troughing at 2.00%. It's also worth noting, that the recent downward pressure on NZ interest rates has seen NZ-US interest rate spreads narrow markedly and this has seen the "˜fair value' range for NZD/USD (according to our short-term valuation model) to around 0.5380-0.5580. As such, we can't see any fundamental reason to chase NZD/USD higher from here. Currency markets have been very skittish this week and this is unlikely to improve much today "“ given the European May Day holiday will likely keep trading light. For today, we expect NZD/USD to struggle towards 0.5700-0.5725. On the downside, support is expected ahead of 0.5600. It was another volatile night in currency markets, but the USD ended up strengthening against most of the major currencies. Global equities put in a mixed performance last night. Asian and European indices chalked up modest gains (in the order to 1.5-3.0%) after Japan's industrial output rose for the first time in six months (industrial production rose 1.6%m/m in March vs. 0.8% forecast). However, Wall Street was more or less flat as investors digested Chrysler's bankruptcy filing. President Obama said Chrysler would try and restructure itself through a quick bankruptcy proceeding, but warned against expectations of "unjustified taxpayer-funded bailout". Despite mixed global equities, strong demand for USD was noted through the NY session from a range of real-money accounts and investment managers, which was thought to be related to month-end re-balancing of currency hedges. After climbing to nearly 1.3400 early in the night, broad based USD strength saw EUR/USD slip below 1.3200. EUR sentiment wasn't helped by weak data, which highlighted the risks to the Eurozone economy. The unemployment rate for the Eurozone rose to 8.9% in March, from an upwardly revised 8.7% in February. The soft European data made a stark contrast to that released in the US. The Chicago PMI rose to 40.1 in April, well above forecasts of 35.0 and last month's 31.4. It's worth noting, that ECB President Trichet has imposed a vow of silence on all ECB council members as the ECB struggles to agree on what to do next to rescue the economy from recession (the EUR/USD has been whip sawed violently over the past week or so on the back of comments from various ECB officials). The Bank of Japan kept its policy rate steady at 0.1% and refrained from expanding its quantitative easing measures in yesterday's board meeting. However, the central bank has downgraded its economic forecasts for the Japanese economy over coming year. It now looks for GDP to shrink 3.1% in 2009, well down on the 2% fall forecast back in January. While the Bank of Japan expects economic conditions to "continue deteriorating in the coming months", it is hopeful that the record US$155b worth of fiscal spending (about 3% of GDP) will hasten a Japanese recovery. ____________ * Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.