Opinion: Brace for a wild ride

By Mike Jones NZD/USD has drawn support from both home and abroad to reach a 5-week high of nearly 0.7100. In fact, the NZD has been the strongest performing currency over the past 24 hours. Yesterday’s 5.7% increase in the Q4 terms of trade was the strongest since 1976. While clearly positive, this needs to be put in the context of a more than 15% cumulative fall over the preceding six quarters as the global financial crisis hit. Still, the data was very much consistent with the ongoing economic recovery we expect in NZ, and helped NZD/USD start the night of a firm footing. Overnight, improving confidence about the global backdrop saw the NZD extend its gains. Not only did Chinese trade data show Chinese exports going from strength to strength (rising 45.7%y/y in February), but comments from former EU Commission President Prodi reinforced expectations the Greek crisis is past the worst. Reflecting the positive sentiment, the S&P500 posted its 5th consecutive gain and European equities also enjoyed modest gains. As a result, investors shunned the ‘safe-haven’ appeal of the USD and JPY in favour of higher yielding currencies like AUD and NZD. NZD/USD was pitched from 0.7060 to nearly 0.7100, before a sharp slide in gold prices knocked NZD/USD from its highs. We’re bracing for a wild ride in the NZD today. Undoubtedly, the main event will be the RBNZ’s Monetary Policy Statement at 9am. But the excitement doesn’t stop there, with Australian employment at 1:30pm and the February Chinese data ‘dump’ at 3:00pm (including retail sales, CPI, PPIs, and industrial production). We expect the RBNZ will stay “on message”, affirming its mid-year focal point for starting to increase its OCR. While recent local data, and international events, argue for more of a delay, forward-looking indicators, and the May Budget, suggest there will be enough momentum to keep the Bank on its previously stated course. We retain our long-held view of a first hike, in June, of 25bps. However, we’re mindful of the risk the bank delays tightening until July, or even September. Given market pricing is centred on a June 25bps hike, any such dovish undertones would provide clear headwinds for NZD/USD, and more so NZD/AUD. Near-term support for NZD/USD is seen towards 0.6950, and 0.7630 on NZD/AUD. Majors Similar themes prevailed in currency markets overnight. Commodity-related currencies extended their recent gains, while ‘safe-haven’ currencies like USD and JPY were sold across the board. Meanwhile, GBP continues to flounder. Risk appetite was bolstered by further evidence the Chinese economy is going from strength to strength. Yesterday’s February trade balance dipped by less than expected, underpinned by a whopping 45.7%y/y gain in Chinese exports (38.3% expected). This only reinforces the case for stronger Yuan, something we expect from around mid-year. Increased confidence about the global outlook was backed up by modest gains in global stocks. The S&P500 is currently up around 0.5% ¬– the 5th consecutive daily increase. European bourses posted gains of 0.7-1.0%. While US wholesale inventories data was a touch weaker than expected (falling 0.2%m/m in January compared to +0.2% expected), further signs of recovery in M&A activity spurred optimism about the US outlook. Talk from former European Commission President Prodi that Greece’s problems are “completely over” and contagion to the rest of Europe is unlikely also underpinned appetite for risk last night. The VIX index (a proxy measure for global risk aversion) dropped as low as 17.5% at one point (the post crisis average is around 29.5%). Sliding risk aversion and optimism about the global backdrop saw investors bail out of ‘safe-haven’ positions in the USD and JPY, in favour of higher yielding currencies like EUR, AUD and NZD. A heavy toll was taken on JPY in particular. USD/JPY rose above 90.70 for the first time since February. Speculation is rife that the Bank of Japan will further ease monetary policy next week, in an effort to stave intensifying deflationary pressures. Yesterday’s 3.7%m/m fall in January’s machine orders only served to highlight the dire Japanese outlook. GBP also remains in the doldrums. Hot on the heels of yesterday’s woeful trade data, January’s manufacturing production showed a surprise fall (-0.9%m/m vs. 0.2% expected), and industrial production also disappointed (-0.4%m/m vs. 0.3% expected). Despite the softer USD, GBP/USD slipped from below 1.4900 from around 1.4980. Comments from Prime Minister Brown that the UK would likely retain its AAA rating provided some solace later in the night, and GBP/USD ground back towards 1.4950. Sentiment towards GBP remains extremely negative. In fact, the speculative community hold the largest net short position in GBP on record (70,790 contracts), raising the risk of a bounce in coming days. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here