NZ dollar begins week firmer despite quake; eyes ahead for RBNZ decision, business confidence
28th Feb 11, 9:18am
by
By Kymberly Martin
News of the devastating Christchurch earthquake was the main driver of the NZD last week. The market’s initial response was to drive the NZD/USD lower by 2.4%. However, the currency appears to have stabilised quite quickly after last Tuesday’s fall. On Friday, the NZD/USD rose from close to 0.7460 to around 0.7520, ending the week down 1.6%.
Friday’s rebound was partly underpinned by a broad rise in risk appetite, and by continued strength in commodity prices. The CRB futures index (a global commodities index) has now risen to levels last seen in September 2008.
The rise in commodity prices, continues to also support the AUD. As the response to Australia’s own natural disasters has entered the recovery and reconstruction phases, the NZD/AUD declined last week, in the wake of the Christchurch earthquake. The NZD/AUD declined from 0.7420 to 0.7380 on Friday night, to end the week down over 2.4%.
However, the broad NZD rebound on Friday saw the NZD strengthen versus its European peers. The NZD/EUR rose from around 0.5430 to close to 0.5460, while the NZD/GBP rose from 0.4650 to 0.4660. The NZD/GBP also benefited from broad-based GBP weakness following a disappointing Q4 GDP release. Last week the GBP/USD was the second weakest performer after the NZD/USD, as markets reassessed expectations for Bank of England rate hikes.
On Friday, NZ short end swap yields rose slightly, although over the week they showed a meaningful decline. 3 month swap rates declined around 30bp last week, and 1-2 year rates declined around 40bp, as markets looked for the RBNZ to cut rates in response to the disaster. We continue to believe that a RBNZ cut is unlikely, although we accept that all options must be considered, as the full effects of the quake become known.
This week, we expect to see some data releases with today’s National Bank business survey being key (some scheduled data releases have been postponed due to the Christchurch earthquake).
Majors
Last week saw currencies responding to a rise in risk aversion with CHF and JPY the best performers over the week, as “safe haven” demand rose. The DXY was down around 1% on the week, although it gained on Friday night.
Risk aversion was the key driver of currencies last week, as political tensions in Libya remained in the spotlight. Over the week the VIX index (a proxy for risk aversion) rose, equity markets declined, and US 10 year bond yields fell, indicative of declining risk appetite. The CHF and JPY were the strongest performing currencies over the week rising 1.84% and 1.77% respectively, as demand for ‘safe assets’ rose.
Friday saw some reversal in sentiment, with the VIX index declining to 19% from 21%, (although still well above the 16% it ended the previous week) and equity markets showing solid gains. The Euro Stoxx 50 closed up 1.2% and the S&P500 rose over 1%. Furthermore, the S&P500 performance was driven by the financials sector, and sectors that are leveraged to the economic cycle (I.T and basic materials), as some growth optimism returned to markets.
In this light, commodity prices rose strongly, helping to underpin Friday’s best currency performers, the “commodity sensitive” AUD, NZD, and CAD.
The DXY index rose slightly on Friday night, after the market reacted positively to the University of Michigan consumer confidence reading that rose to 77.5 (75.5 expected) from 75.1 previously. The Q4 GDP release on Friday night came in at 2.8% annualised (3.3% expected). Despite this disappointment the DXY rose from 77.00 to around 77.30.
The EUR/USD declined on Friday on the back of USD strength, in the absence of domestic drivers. The EUR/USD fell from 1.3820 to 1.3740.
The GBP/USD also fell on Friday on the back of a weak Q4 GDP release, showing a 0.6%q/q decline (-0.5% expected). This complicates the dilemma for the Bank of England that faces faltering growth, in the backdrop of inflation that is double its 2% target. The GBP/USD fell from around 1.6140 to 1.6040, before closing around 1.6120.
Today we will receive Eurozone CPI data that will shed some light on the inflation component of the ECB’s outlook. The US will see the release of the Chicago PMI and pending home sales, while Fed members Dudley and Rosengren are also expected to speak.
Mike Jones and Kymberly Martin are part of the BNZ research team.
All its research is available here.
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