By Kymberly Martin
As the harrowing rescue and recovery efforts continue in the quake ravaged Canterbury region, the NZD has found some support, after its knee-jerk fall earlier in the week.
The NZD/USD was supported by a broadly weaker USD overnight, and by a market that is now attempting to rationalise the longer term impacts of the earthquake on the NZ economy, after the initial response. Overnight the NZD/USD traded between 0.7440 and 0.7500, currently trading around 0.7480.
We continue to believe that it is unlikely that the RBNZ will respond to the disaster by cutting national interest rates, and to do so would be a rather blunt instrument, for an event that requires a much more targeted approach. However, OIS markets continue to price expectations of interest rate cuts from the RBNZ.
NZ 1-2 year swap rates have now fallen over 35bp since prior to the earthquake, reducing the interest rate differential support for the currency, in the near term.
The NZD/AUD showed some volatility overnight, ending slightly lower at around 0.7420. The NZD/EUR was somewhat range bound trading between 0.5410 and 0.5440, overnight.
The NZD/GBP was a beneficiary of broader GBP weakness. The GBP came under pressure in the wake of the release of weak CBI retail sales volumes data. The NZD/GBP rose to 0.4640, bouncing off its recent lows.
After the quiet NZ data week, this week, we expect to see some releases next week with the Monday’s National Bank business survey being key (some scheduled data releases have been postponed due to the Christchurch earthquake).
Majors
The USD eased lower overnight, unable to make any headway in the backdrop of some disappointing data releases. Elsewhere risk aversion remained the key driver of markets, with “safe haven” demand for CHF and JPY.
Risk aversion remains elevated, given ongoing uncertainly in the Middle East, with the VIX (a proxy for risk aversion) still holding up around 22%. Reflecting supply concerns, the price of oil threatens to break $US100/barrel, levels last seen in January 2008.
Equity markets remain under pressure with the Euro Stoxx 50 closing down 0.2%, and the S&P500 currently down around 0.5%. “Safe haven” assets remain in demand with US 10 year bond yields declining further to 3.42%, and CHF and JPY being the best performing currencies overnight.
The DXY ended the night around 77.100, slightly lower than it started, in the backdrop of mixed data releases.
While weekly jobless claims were better than expected at 391k (405k expected), the rest of the data was largely disappointing. Durable goods-ex-transportation came in at -3.6% for January (0.5% expected), new homes sales declined 12.6%m/m in January (-7.3% expected) and the house price index for December declined 0.3%m/m (-0.1% expected).
The EUR moved up overnight to around 1.3800 after dipping lower earlier in the night after the release of the Eurozone business climate indicator. While the indicator for February came in at 1.45, below expectations for 1.6, the indicator, which is closely associated with industrial production, remains at an elevated level, its highest since 1985. Later in the night the currency rallied, spurred by quotes of ECB’s Weber, saying “rates only know one direction and that is north”, when he was part of a panel discussion in Frankfurt.
The GBP came under pressure, being the weakest performer overnight, after a weak CBI reported sales number. It showed monthly retail sales volumes for February at 6, well below the expectation of 28.
Today, look out for the release of UK Q4 GDP, US Q4 GDP and the University of Michigan Confidence indicator for February.
Mike Jones and Kymberly Martin are part of the BNZ research team.
All its research is available here.
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