By Mike Jones*
Yesterday’s RBNZ Monetary Policy Statement was marginally more dovish than we were expecting. It appears the Bank has been spooked by the continued run of weak real economy data.
The concern that this has engendered has resulted in the Bank further postponing any thoughts of resuming the hiking cycle that began in June 2010 and stalled just one month later. Indeed, the RBNZ seems to have settled on June 2011 for the next move.
With market expectations having already shifted to a June resumption of the tightening cycle the market reaction was understandably muted. Swap yields fell 1-5bps across the curve and the NZD/USD slipped from 0.7500 to around 0.7440.
However, it was a different story in NZD/AUD.
The double whammy effect of the dovish RBNZ Statement and yesterday’s eye-poppingly strong Australian employment figures (+54.6k vs. 20k expected) slammed the cross to within a whisker of 10-year lows around 0.7570. NZ-AU 3-year swap spreads fell to a 3-week low around -130bps. The fall in NZD/AUD brings it into line with the 0.7450-0.7650 “fair-value” range implied by our short-term NZD/AUD valuation model.
The NZD/AUD had been trading above the top end of the model’s “fair-value” range since mid-October. For further falls in NZD/AUD to be sustained we’ll have to see further clear deterioration in the model’s drivers (NZ-AU interest rate differentials, relative business confidence and commodity price differentials).
We suspect this could be a stretch in the short-term hence NZD/AUD dips are expected to be limited to the 0.7500/50 region in coming weeks.
We expect today’s Overseas Trade Indexes to register a mainly technical correction in the merchandise terms of trade, with export volumes also probably down a bit on timing issues, following a couple of good quarters.
We already have a net export drag for Q3 GDP. The question is whether it’s enough. Unless we see a sizeable surprise from the OTIs, NZD/USD is expected to be contained by the familiar 0.7450-0.7500 range today.
Majors
The upshot of last night’s fairly choppy trading is that the USD finished up slightly firmer against most of the major currencies. The exception is against the ‘commodity currencies’ like the AUD and CAD which have largely held their ground. The night started out with a weaker USD. Demand for “safe-haven” currencies like the USD was crimped by rising risk appetite as sentiment towards the global economy improved, reflected in modest gains in stock markets and commodity prices.
Not only did Q3 Japanese GDP outstrip analysts’ already robust expectations (1.1%q/q vs. 1.0% expected), but yesterday’s November Australian employment report was an absolute screamer (+54.6k vs. 20k expected). The Nikkei rose 0.5%, the ASX 200 increased 0.8% and the Hang Seng ticked up 0.3%. At the same time, copper prices soared to a fresh record high above US$9000/tonne and gold prices edged up 0.5% to around US$1390/ounce.
However, later in the night USD sentiment rebounded, driven by a sell off in the EUR/USD.
First, ratings agency Fitch slashed Ireland’s sovereign credit rating three notches to BBB+.
Second, Ireland’s opposition party said it will vote against the €85b EU-IMF bailout package.
Renewed fears over the sovereign solvency of Ireland knocked the EUR/USD from above 1.3300 to around 1.3200, paving the way for a broader strengthening in the USD. Still, it’s notable that Irish sovereign bond spreads were largely unchanged on the day around 500bps.
There were no surprises from the Bank of England’s policy announcement overnight. The BoE kept its key policy rate unchanged at 0.5% and left its asset purchase target at £200b. Still, the combination of last night’s marginally weaker than expected UK trade balance (-£8.5b vs. -£8.1b forecast) and the sliding EUR dragged GBP/USD from around 1.5840 to almost 1.5720.
There wasn’t a lot of action in global equity markets overnight. European equity indices rose modestly, while US stocks were broadly flat. The S&P500 opened some 0.5% stronger following more good news on the US labour market from last night’s jobless claims data (which dropped to 421k, from 436k the previous week). But renewed European jitters soon had equities back peddling.
Looking ahead, we wouldn’t be surprised to see more rangy trading in the short-term with the US consumer confidence (University of Michigan) and UK PPIs the only data of note to be released tonight. But watch out for the weekend’s Chinese data dump. Rumours are already circulating that China will raise reserve requirements again over the weekend to counteract rising inflation pressure.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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