NZ dollar takes a breather as commodity prices stall; Euro strengthens on hawkish ECB comments; Focus ahead to US jobs data

 

By Mike Jones*

 

After the sharp gains of last week, the NZD paused for breath overnight. The NZD/USD simply shuffled sideways in a 0.7490-0.7550 range.

There was relatively little new information for currency markets to digest overnight. Reflecting this lack of direction, most of the major currencies drifted aimlessly.

 

The NZD/USD spent the first part of the night dribbling lower, as modest declines in commodity prices sapped demand for “growth-sensitive” currencies. Oil prices slipped below US$105/barrel and the broad CRB commodity price index declined just over 1%.

 

However, later in the night, a rebound in the EUR helped drag the NZD/USD back above 0.7500. Hawkish rhetoric from ECB President Trichet reinforced market expectations of near-term ECB rate hikes, bolstering EUR sentiment.

 

Looking ahead, we doubt the NZD/USD will be able to sustain its recent rapid pace of gains in coming weeks. Indeed, we find it difficult to identify a possible trigger to send the currency substantially higher. Speculative positioning now looks more balanced (after last week’s positive GDP figures prompted a mild squeeze on short positions), risk appetite has returned to its buoyant pre-Japanese crisis levels, and the market’s near-term RBNZ cash rate expectations look broadly similar to our own (on hold at 2.5% for the next five meetings).

 

What’s more, last week’s NZD/USD gains look a little overstated relative to ‘fundamentals’. Indeed, the NZD/USD ‘fair-value’ range estimated by our short-term valuation model has remained constant at 0.7100-0.7300.

 

Still, whether or not we see a near term NZD/USD correction back towards ‘fair-value’ will largely depend on USD sentiment, in our view. If we are to see USD strength knock the NZD/USD from its highs, we’ll have to see either risk appetite falter (bolstering “safe-haven” demand for the USD) or upcoming data reinforce Fed officials’ increased optimism about the US economy.

 

Friday’s non-farm payrolls report will important to watch in this regard.

 

All up, we doubt rallies above 0.7650 in NZD/USD will be sustained in the near-term. The bigger risk seems to be for a push back towards 0.7400. For today, support will be found on any dips towards 0.7480, with initial resistance expected on bounces towards 0.7575. 

 

Majors

Currency markets struggled for direction overnight. With little in the way of economic data, and a mixed performance in global equity markets, most of the major currencies simply bounced around inside their recent ranges. The USD index drifted lower from 76.40 to around 76.10.

 

The EUR was one of the more volatile currency pairs. Early in the night, the EUR/USD extended Friday’s losses as debt concerns flared up again.

 

Ratings agency S&P cut the credit ratings on Portugal’s five largest banks, sending the Portuguese/German 10-year bond spread to the highest level on record (463bps).

 

Nonetheless, after a brief dip to around 1.4020, the EUR/USD was soon rebounding back above 1.4100 as the likelihood of impending ECB rate hikes was brought back into focus. ECB President Trichet said “inflation rates are durably above…price stability in the euro zone”. In response, ECB tightening expectations moved up to 125bps over the next 12 months, from 120bps.

 

The GBP was one of the night’s weakest performers. Over the past three weeks, markets have been paring the extent of Bank of England tightening expected this year, knocking some of the wind out of GBP. This theme continued overnight after the BoE’s uber-dove Posen said he would resign if his call for more quantitative easing proved unjustified. GBP/USD skidded to 1½ month lows below 1.5960 and EUR/GBP ground up to 4½ month highs.

 

US Treasury yields mostly held onto Friday’s sharp gains, providing a prop for the USD, as the encouraging tone of US data continued. Consumer spending rose for an eighth straight month in February (0.7%m/m vs. 0.5% expected), February new home sales figures revealed a surprising jump (2.1%m/m vs. 0% expected) and the core PCE (the Fed’s preferred core inflation measure) ticked up 0.2% in February, as expected.

 

The robust figures helped lift sentiment on Wall St. US stocks managed to eek out small gains (the S&P500 is up around 0.2%) after a mixed performance on European bourses.

Looking ahead, most of the key upcoming event risk occurs late in the week, with US non-farm payrolls and the ISM manufacturing index both released on Friday.

 

A strong payrolls result would add credence to the Fed hawks’ views that the Fed’s super-accommodative policy stance will have to be unwound before long. Such a scenario would provide fundamental support to the USD. Tonight brings the final estimate of UK GDP and a speech from the Fed’s Bullard.