By Mike Jones*
‘Growth-sensitive’ currencies like NZD and AUD have come off the boil sharply while we have been holed up avoiding wet weather over the Queen’s Birthday weekend.
The NZD trading sharply lower to the US 66 cent level in fractious markets over the long weekend, providing some opportunity for domestic clients to hedge at attractive levels as leveraged and real money accounts divested risk appetite.
Worries about European prospects hurt risk and there was no good news from Friday’s US data or the G20 meet to counter the woeful news from Europe. Equity markets bled a sea of red ink across screens as risk aversion rose, with commodity markets also notably weaker. Aside from the global focus, it is a busy week on the home front.
The RBNZ June MPS on Thursday will be the focus over the coming week.
We think the time has come for the RBNZ to start raising interest rates. Domestic data has been stronger than expectations and long-term inflation expectations have crept to an uncomfortable level. These developments are probably enough to convince the RBNZ to lift 25bps in June, rather than waiting until July.
However, a hike in June is no certainty given ongoing international concerns. We will also get a host of partial indicators for Q1 GDP during the week.
Tuesday’s data on building work put in place and manufacturing should be strong enough overall, as we look for the goods-producing sectors to make a positive contribution to overall Q1 GDP growth.
Thursday’s Q1 trade data is unlikely to be as directly positive for Q1 GDP with both export and import volumes likely to be subdued.
Nevertheless, watch for a very strong lift in the terms of trade as higher export commodity prices filter through to the official statistics.
Also on Thursday, we get the latest BNZ-Business NZ manufacturing PMI that may ease from recent lofty highs and electronic transactions data for May that will give a timely gauge of the pulse in consumer spending.
After the Thursday data blockbuster, the week rounds out with food prices for May that we suspect will bounce back from the dip in April.
Majors
The start of the week saw Asian markets sharply lower continuing the sell-off in Europe and the US on Friday. Friday afternoon was dominated by a weak US non-payrolls print.
With the Census expected to add around 420,000 jobs in May, the market had been looking for a reading of around 600K or so to indicate that the US jobs market was rebounding at a decent pace. In the event, the rise in payrolls was just 431K, implying a weak 41,000 increase in private sector employment.
While there were better readings on average hours and earnings, the overall tone of the report raised concerns over the health of the economic recovery.
Friday night’s weak US jobs report suggested its economy wasn’t shifting up a gear but may be stuck in neutral.
On top of these worries, the sovereign debt crisis impacting Europe saw a shift in focus to Hungary, where a government spokesman didn’t do much to assuage concerns about the nation’s deficit by saying that it wasn’t ‘an exaggeration at all’ to speculate about the country being unable to repay its debt.
Hungarian officials have tried to reverse these comments on their fiscal morass overnight, the comments welcomed by markets though the volatility has coloured expectations.
Further concern arose over the weekend when the German Weekly Der Spiegel reported that the German Constitutional Court is weighing the possibility of imposing an interim order against Germany's participation in the EUR750bn EU/IMF fiscal rescue package.
The IMF weighing in with comments that a half hearted approach to fiscal consolidation could trigger a sharp drop in the currency.
The G20 meeting of finance ministers and central bankers in South Korea didn’t do much either to foster a collegiate view on the way forward for the world economy. The final communiqué dropped language supportive of ongoing fiscal expansion, but the US raised concerns that fiscal tightening may derail the recovery.
The body also failed to agree on the bank-levy part of financial reform, leaving it to individual countries to implement as they wish.
While ECB head Trichet argued in favour of shrinking budget deficits quickly to improve confidence in public finances, US Treasury Secretary Geithner called for stronger demand growth in Japan and in the European surplus countries (such as Germany).
He also believed that fiscal consolidation should be achieved over the “medium term” rather than quickly.
Growth sensitive currencies have predictably then had a rough start to the week, sliding on the souring in sentiment. The euro touched the 1.1880 level against the US currency, and reached its lowest level against the yen since 2001.
Over the rest of the week the highlights include central bank meetings at the ECB and Bank of England, UK industrial production and US retail sales.
* Mike Jones is a currency strategist at BNZ. All of BNZ's economic research is available here.
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