US dollar boosted by 'safe haven' flight with oil prices up amid Middle East tension

US dollar boosted by 'safe haven' flight with oil prices up amid Middle East tension

By Mike Jones

The NZD has outperformed over the past 24 hours. Indeed, the currency largely shrugged off a broadly stronger USD overnight, trading choppily inside a 0.7600-0.7650 range for most of the night.

Yesterday’s local data probably helped bolster NZD sentiment. Most notably, January’s credit card billings looked very strong, rising 3.8% in the month to be up 5.6% on a year ago.

Along with the 2.2% lift in the broader Electronic Card Transactions data, this portends a sizeable lift in consumer spending in January.

In addition, market chatter about a possible rise in Fonterra’s current $6.90 payout forecast sometime in the next few days also acted to keep the NZD well supported on the cross rates. Indicative of such, NZD/AUD climbed from 0.7520 to above 0.7560 overnight, helped by AUD selling from a mix of technical and model accounts. Still, a mild bout of risk aversion curbed the NZD/USD advance at around the 0.7650 level overnight.

Rising political tensions in the Middle East saw most European equity indices fall over 1%, while S&P500 futures are down by a similar amount (US markets were closed for the President’s Day holiday overnight). In contrast, rising supply concerns saw oil prices surge nearly 6% overnight.

Looking ahead, this week’s comparatively quiet NZ data schedule would appear to set the stage for more rangy trading in the NZD/USD this week. However, if anything, we suspect the balance of risks are tilted towards a test of the bottom end of the familiar 0.7500-0.7750 range. Not only is fundamental support for the USD beginning to emerge (through rising US bond yields), but valuation metrics continue to suggest the NZD/USD is a touch overstretched.

For today, the RBNZ Survey of Expectations (3pm NZT) will be worth noting for a steer on how inflation expectations are tracking. Today’s Fonterra board meeting will also be of significant interest with all and sundry now looking out for a bump up in its payout forecast.

Majors

The USD strengthened relative to most of the major currencies overnight, thanks to rising demand for “safe-haven” assets. Still, with US markets on holiday, movements in currency markets have been fairly muted over the past 24 hours. Early in the night, gains in the EUR and GBP again set the USD on a path lower. Not only did more hawkish ECB rhetoric bolster EUR sentiment, but last night’s Eurozone economic data was fairly upbeat.

Eurozone manufacturing and services PMIs both rose by more than expected in February, and the German IFO business sentiment index surged to a record high – its 9th consecutive increase. From around 1.3680, solid EUR/GBP buying helped push EUR/USD briefly back above 1.3700. The GBP also spent the early part of the night on the ascendency. GBP/USD ground up to around 1.6250 in the wake of comments from Bank of England policymaker Weale that a small rate rise now could reduce the need for a larger rise later.

However, later in the night, rising Middle Eastern political tensions took the edge off investors’ risk appetite, spurring renewed demand for “safe-haven” currencies like the USD and JPY. Indicative of rising risk aversion, European equity indices slipped 1.1-1.8%. US equity markets were closed but S&P500 futures are currently down almost 1%.

Against the broadly stronger USD, EUR/USD eased from 1.3700 to around 1.3660, GBP/USD dribbled off to nearly 1.6200 and the AUD/USD skidded from 1.0130 to 1.0080. The increase in violence in Libya and the Middle East, and the resulting supply concerns, saw (NYMEX) oil prices surge nearly 6% overnight to fresh 2½ year highs above US$91/barrel. Against this backdrop, it wasn’t surprising to see the CAD take out the title of best performing currency overnight. USD/CAD slipped from 0.9870 to around 0.9820.

Flight to safety flows also supported a 1.2% rally in the gold price (to around US$1400/ounce). Looking ahead, the global data calendar looks fairly light this week. US existing home sales (Wednesday) and UK and US Q4 GDP (Friday) look set to be the highlights.

However, there is an abundance of central bank speak to keep an eye on. Officials from the Federal Reserve, ECB, BoE, and RBA are all scheduled to speak. Should ECB and BoE policymakers pour cold water on the market’s relatively hawkish monetary policy expectations, we’d expect the GBP and EUR to lose some of their lustre, providing support to the USD.

A further escalation in the current political tensions in the Middle East would also support the USD through increased “safe-haven” demand. Near-term, solid support on the USD index is eyed towards 77.00 with initial resistance likely to be found around 78.20.

Mike Jones is part of the BNZ research team. 

All its research is available here.

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