By Danica Hampton
The NZD/USD has spent most of the past 24 hours within a 0.5550-0.5720 range.
Overnight, most of the focus was on whether or not the USD will be replaced by SDRs as the reserve currency of choice (a possibility raised by Chinese official late last week). Early in the night, fears that central banks may shift their foreign reserve holdings (from USD to SDR) weighed on the USD. The combination of a generally weaker USD and solid demand for NZD out of Japan saw NZD/USD climb from around 0.5550 to above 0.5700.
However, the NZD/USD strength didn't last. US Treasury Secretary Geithner told us the USD would remain the world's dominant reserve currency. Sentiment that was echoed by the head of the IMF, who said he didn't believe the USD's days as a reserve currency were over. The official reassurance on the SDR vs. USD debate saw the USD rebound towards the end of the night and NZD/USD was knocked off its highs.
Yesterday's Westpac McDermott Miller (WMM) consumer confidence report showed that pessimism remains the order of the day for NZ households. The headline index dropped from 101.2 to 96.0, while far from tragic "“ given interest rates have plunged and we're about to get a second round of tax cuts "“ this does suggest consumer sentiment is vulnerable to further weakness. Today's current account data will be closely watched as the deficit is expected to widen to about 9% of GDP. However the main event will be tomorrow's Q4 GDP, which is expected to show the economy contracted 1.1%q/q.
For today, we suspect NZD/USD will struggle above 0.5700 and 0.5750 will likely cap the topside. On the downside, initial support is seen around the 0.5550 region, a break below this level is needed to suggest a deeper correction is on the cards.
The USD held steady against the major currencies last night as investors digested better than expected US and Eurozone data and mulled over the idea of SDRs (special drawing rights) becoming the new reserve currency.
Late last week, Chinese officials floated the idea that SDRs could replace the USD as the international reserve currency. Why all the fuss? Looking at global central bank reserves, about 65% are held in USD, 25% in EUR and less than 5% are held in GBP. In contrast, the SDR basket of currencies is made up of 44% USD, 34% EUR, 11% JPY and 11% GBP. As such, switching to SDRs "“ all things equal "“ would tend to weigh on USD and support EUR and GBP.
Last night, US Treasury Secretary Geithner said he was open to the China's suggestion, but also noted "the dollar remains the world's dominant reserve currency" and this will likely "continue for a long period of time". Echoing Geithner's sentiment, the head of the IMF said he didn't believe the USD's days as a reserve currency are over and said the Chinese don't believe it either. The overnight reassurance that USDs would remain the main international reserve currency helped provide a bit of support for USD towards the end of the session.
EUR/USD spent most of the night in a 1.3400-1.3650 range. However, GBP was surprisingly heavy, falling from above 1.4700 to nearly 1.4500. GBP was weighed down by fears the UK would struggle to finance its burgeoning fiscal deficit, after last night's UK government bond auction failed to attract sufficient bids (bids fell more than £100 million short of the sale of £1.75 billion in securities, which temporarily sending gilt prices tumbling).
Last night's economic data tended to surprise on the upside. While headline index of the German IFO printed bang on expectations at 82.1 in March, the current assessment index printed at 82.7 (vs. 82.5 forecast) and the expectations index rose to 81.6 (vs. 81.5 forecast).In the US, not only did durable goods orders rise 3.4%m/m in February (vs. -2.5% forecast), but new home sales rose 4.7%m/m to 337,000. Nonetheless, global equities were mixed. The DAX rose 0.86%, but the FTSE fell -0.3% and the S&P500 is currently down 1.5%.
As widely expected, the Bank of Norway cuts interest rates by 50bps to 2.00%. However, the accompanying statement was relatively dovish and warned the cash rate may get as low as 1.00% in coming months.
* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
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