By Mike Jones
As we flagged yesterday, the NZD/USD sell-off as a result of the weekend’s Christchurch earthquake proved short lived. After opening the week 20 points lower around 0.7180, the NZD/USD has spent the rest of the past 24 hours drifting higher.
We noted yesterday that, if anything, the economic impact of the quake was likely to be positive, with the initial negative impact likely to be swamped in time by the reconstruction of homes, commercial buildings and infrastructure. It seems markets share a similar view; local swap rates pushed 5-10bps higher yesterday and an extra 10bps of RBNZ tightening was factored into the OIS curve (such that a total of 54bps of tightening is priced in over the next 12 months).
As a result, NZ-US 3-year swap spreads widened from around 300bps to 307bps, underpinning yesterday’s NZD gains. NZD/USD climbed from 0.7180 to almost 0.7250 and NZD/AUD lifted from 0.7850 to nearly 0.7900. Looking ahead, partial indicators for Q2 GDP dominate the NZ data flow in the week ahead.
However, in the absence of a significant data surprise, direction for the NZD/USD is expected to come from offshore. Indeed, the resurfacing of global growth fears has restored risk appetite as the key driver of “growth-sensitive” currencies like the NZD/USD. We’ll be keeping a close eye on equity market sentiment as a key barometer of investors’ risk appetite. It’s worth noting that the one-month rolling correlation between NZD/USD and the S&P500 has increased to around 94% over the past few weeks, from an average of 67% in June and July.
For today, keep an eye on NZ wholesale trade data at 10:45am. However, developments across the Tasman will probably hold more relevance for the NZD/USD. Not only is the RBA’s latest policy announcement due at 4:30pm (no change expected), but Australian PM Gillard is expected to announce whether she can form a new minority government. Initial resistance on NZD/USD is eyed towards 0.7260, with support at 0.7145.
Currencies markets barely stirred last night, not surprising given the dearth of fresh economic news and the fact US markets were closed for the Labour Day holiday. The USD index simply shuffled sideways in a 81.90-82.10 range. Nevertheless, investors in Europe and Asia started the week in an upbeat frame of mind, reflecting last week’s string of encouraging global data.
Talk of double dip recessions and deflation continues to recede, providing a leg-up to investors’ risk appetite. Indicative of such, Asian stocks recorded their fourth consecutive day of gains yesterday. The Shanghai Composite rose 1.8%, the Hang Seng jumped 1.8% and the Nikkei increased 2.1%. The positive sentiment soon flowed through to European markets.
European stock indices posted modest gains of 0.2-0.4% overnight. News US President Obama will unveil a US$50b infrastructure package tonight in an attempt to prop up the stuttering US economy further underpinned global risk appetite overnight.
Global growth sensitive currencies like CAD, AUD and NZD again outperformed, reflecting the more upbeat sentiment towards the global economy. USD/CAD slipped from almost 1.040 to below 1.0350 and AUD/USD climbed to within a whisker of 4-month highs above 0.9180. USD/JPY drifted off from around 84.50 to nearly 84.10. As long as US-JP 2-year bond differentials remain around current lows (of around 35bps), we suspect rallies in USD/JPY will be limited to the 86.00 region in the short-term.
Despite the increasingly more optimistic global sentiment, most of the major currencies remain trapped within their recent ranges, suggesting investors remain cautious on the sustainability of the global economic recovery. We suspect this week’s notably light data flow won’t provide any firm answers on this front, setting the scene for more rangy trading. However, keep an eye out for Friday’s Chinese trade figures and UK and German industrial production on Wednesday.
Central banks will be in the spotlight with the RBA (today), Bank of Japan (today), the Bank of England (Thursday) and the Bank of Canada (Wednesday) all due to meet. Only the BoC is expected to shift rates (a 25bps rate hike is expected). In contrast, speculation about a possible extension to the BoE’s quantitative easing program may well keep GBP/USD heavy going into Thursday’s meeting.
Lastly, some volatility may be in store for the AUD today given Prime Minister Gillard is set to announce whether she can form a new minority government.
* Mike Jones is part of the BNZ research team.