Opinion: Kiwi$ solid despite NZ economy doubts; Singapore revalues S$

By Mike Jones After slipping half a cent in the wake of yesterday’s poor retail numbers, a broadly weaker USD saw NZD/USD recover lost ground overnight. From lows around 0.7090 yesterday afternoon, NZD/USD is now closer to 0.7140. The unexpected negativity in February’s retail spending was a significant offset to the positive news from Tuesday’s electronic card transactions, for March. While the 0.6% drop in total retail sales (-0.9% ex-auto) didn’t dampen our growth expectations, it does question the pace of the recovery for the moment. Accordingly, if the RBNZ is looking for an excuse to delay its first hike until July, then yesterday’s retail results would certainly help the case. This sentiment was indeed reflected in market pricing, with traders paring expectations for a June 25bps RBNZ hike to a roughly 50/50 chance. In response, NZD/USD skidded below 0.7100 and proprietary and leveraged accounts added to ‘short’ NZD/AUD positions, dragging the cross below 0.7650. Nevertheless, NZD/USD once again found support around the 0.7070/80 region. And, overnight, a broad-based slide in the USD saw NZD/USD recover. Risk appetite was bolstered by fresh optimism about the global economic outlook. Upbeat Eurozone industrial production and US retail sales data buoyed equity market sentiment, as did a better-than-expected Q1 profit report from JP Morgan. Global equity markets posted gains of 0.6-1.5% with the CRB commodity price index jumping around 1%. As a consequence, investors shunned ‘safe-haven’ currencies like the USD and JPY in favour of ‘growth-sensitive’ currencies like the NZD and AUD. Against a backdrop of firm equity markets and buoyant risk appetite, we’d expect dips in NZD/USD to be limited to 0.7070 in the short-term. Still, doubts about the pace of NZ’s economic recovery may present headwinds for the NZD/USD on bounces towards 0.7200. In sum then, expect a bit more range trading in the NZD today. Majors The USD weakened against most of the major currencies overnight, driven by firming risk appetite and signs US interest rates are unlikely to be raised anytime soon. Optimism about the global outlook was bolstered yesterday by the Monetary Authority of Singapore’s (MAS) decision to revalue the SGD. Hot on the heels of the whopping 32.1% annualised increase in Q1 GDP (18.4% expected), the MAS moved up the SGD trading band and switched to a policy of “modest and gradual appreciation.” The decision not only underscored confidence in the Asian outlook, but boosted speculation that China will soon revalue the Yuan. Market chatter suggesting today’s Q1 Chinese GDP figures will exceed expectations may have also contributed in this regard. Upbeat global data and buoyant equity markets reinforced the notion the global economic recovery is continuing, despite ongoing concerns about sovereign risk. European industrial production jumped 0.9%m/m in February (compared to the 0.1% forecast) and US retail sales data suggested a broadening of the US recovery (rising 1.6%m/m in March vs. 1.2% expected). US stocks rose 0.7-1.2% (to new highs for the year), helped by better-than-expected earnings from JP Morgan. European bourses were up 0.6-0.8%. The VIX index (a measure of investors’ risk aversion) slid from 16.2% to below 15.8%. Renewed optimism about the global recovery and improving risk appetite encouraged investors to trim positions in ‘safe-haven’ currencies like USD and JPY. EUR/USD rose from 1.3620 to almost 1.3680, with further gains stymied by comments from ratings agency Moody’s that the chances of a Greek ratings cut are still greater than 50%. USD/CAD reached 22-month lows below 0.9970 and GBP’s solid run continued following recent data suggesting the UK economic outlook is not as bad as some had feared. GBP rose to 1½ month highs around 1.5480. However, the bigger driver of last night’s slide in the USD was a relatively downbeat commentary on the US economy from Fed chairman Bernanke. At his testimony before Congress, Bernanke focused on the risks to US growth and stressed inflation “was not an immediate concern”. Tepid March CPI data tended to support this stance (+0.1% m/m – on expectations). Given this, Bernanke reiterated the Fed’s pledge to keep interest rates low “for an extended period”. US interest rates slipped in the wake of the comments and USD/JPY skidded below 93.00. In the near-term, we suspect the backdrop of reduced expectations for Fed rate hikes and renewed optimism about the global recovery will keep the USD a little heavy. Bounces in the USD index are expected to be limited to 80.70 with support towards 79.80. *All of the research produced by the BNZ Capital team of economists is available here