IMF says NZ dollar up to 25% overvalued, BNZ says 15%
By Mike Jones
The New Zealand dollar (NZD) was one of the weakest performing currencies overnight.
After climbing to an overnight high of almost 0.6750, NZD/USD has since slumped back to nearly 0.6650. A cautious recovery in risk appetite was the main theme in currency markets overnight. Amid all the pessimism about Europe’s sovereign debt woes, a clear reminder the global economic recovery remains on track provided some welcome cheer. Not only did last night’s US data reinforce optimism about the US recovery, but the OECD revised up its forecasts for global growth to 4.6% for 2010 and 4.5% in 2011 (previously 3.4% and 3.7% respectively).
Easing fears about global growth saw equities and commodity prices pare some of their recent losses. European equities jumped 1.6-2.3% and the CRB index of global commodity prices rose 1.6%. Against this backdrop, investors dipped their toes back into ‘risk-sensitive’ currencies like the NZD and NZD/USD climbed from 0.6650 to around 0.6740.
However, the highs in the NZD didn’t last for long. Not only did US stocks fail to hold onto their early gains (the S&P500 closed down 0.6%), but the IMF repeated their view “the NZD may be overvalued by 10 percent to 25 percent”. The knee-jerk reaction to the comments saw NZD/USD slip back to around 0.6650.
As we have noted in the past, we agree with the IMF that the NZD is overvalued in a long-run sense. In fact according to our long-run PPP model, we estimate the currency is currently around 15% over-valued.
However, this should have relatively little bearing on short-term movements in the NZD. Currencies can, and usually do, spend long periods of time overvalued. Indeed, a typical NZD/USD upswing lasts 3-5 years with the currency usually topping out 20-25% above “fair-value”. Near-term headwinds for NZD/USD in the form of negative momentum and subdued risk appetite remain in place for now. As a result, we suspect NZD/USD rallies will be limited to the 0.6680 region in the short-term.
Most of the major currencies strengthened against the USD overnight as a tentative improvement in risk appetite reversed recent flight to quality flows. A timely reminder of the robust global economic recovery that’s underway served to allay fears about contagion from Europe’s sovereign debt woes, buoying stocks and ‘growth-sensitive’ currencies. The OECD raised its forecast for global growth to 4.6% for 2010 and 4.5% in 2011 (previously 3.4% and 3.7% respectively).
In addition, US Treasury Secretary Geithner gave the European bailout fund his stamp of approval and said markets want to see it put into action. European stocks surged 1.6-2.3%, and US stocks also started the night on the front foot. Some fairly buoyant US economic data added to markets’ more positive view of the world. Durable goods orders rose at more than double the expected pace in April (2.9% vs. 1.3% expected) and April new home sales soared to two-year highs (14.8%m/m vs. 3.4% expected). Rebounding equity markets and easing risk aversion (the VIX index fell from 36% to below 32%) prompted a mild recovery in ‘risk-sensitive’ currencies, as safe-haven demand was pared back. Easing fears about global demand also underscored solid gains in commodity prices.
Oil prices jumped over 3% to around US$71/barrel, which saw USD/CAD slip from 1.0740 to nearly 1.0620. Commodity price gains and media reports suggesting the Rudd government could drop the “super-profit” tax on resource companies ensured AUD also outperformed. AUD/USD pushed up from 0.8200 to above 0.8350, before drifting off its highs. The EUR remained the obvious weak spot amongst the majors, despite last night’s cautious improvement in sentiment. Indeed, EUR/USD again flirted with 4-year lows around 1.2180, and most of the EUR crosses ended the night lower.
Not only did market chatter suggest a large Spanish bank is having trouble rolling over its debt, but the FT reported China is reviewing its holdings of Eurozone debt in light of the sovereign debt crisis. Looking ahead, aside from tonight’s US GDP figures and Friday’s US consumer confidence data, there is precious little economic information for markets to watch out for. As such, we suspect all eyes will remain on equity markets to provide near-term direction for currencies. Should future data continue to restore optimism about the global recovery, a reduction in risk aversion should support further improvement in ‘growth-sensitive’ currencies.
However, with negative EUR momentum firmly engrained, the EUR/USD is expected to struggle towards 1.2350.
*Mike Jones is a BNZ currency strategist.