By Mike Jones
The NZD/USD largely thumbed its nose at yesterday’s worsening balance of payments figures. The annual current account deficit increased from 2.4% of GDP to 3.0% in Q2, the beginnings of what we expect to be a trend re-widening. Despite this, the up-thrust from a broad-based weakening in the USD propelled the NZD/USD to 8-month highs above 0.7400 overnight.
Yesterday’s hint from the US Federal Reserve that it is considering lobbing out another round of quantitative easing has undermined US bond yields and the USD over the past 24 hours. US 10-year bond yields slid a further 6bps overnight to be down almost 30bps in little over a week.
The prospect of rock-bottom interest rates in the US for an extended period saw investors again shun the USD overnight. The EUR led the gains amongst the majors as concerns about sovereign debt in the region continue to abate. Indeed, EUR/USD jumped to 6-month highs above 1.3400 overnight, pulling NZD/EUR below 0.5500.
Against the broadly weaker USD, the NZD/USD was dragged above 0.7400 for the first time since January this year. NZD sentiment received an additional leg-up after the head of the NZ Debt Management Office said “there is clear scope for the NZD to appreciate in the medium-term”.
It’s worth noting, both NZ-US 3-year swap spreads and global risk appetite are well below levels prevailing when the NZD/USD was last above 0.7400. This suggests USD weakness, rather than ‘fundamentals’ has been the key driver of the recent bout of NZD/USD strength.
Looking ahead, today’s June quarter GDP figures will help determine whether the NZD/USD can hold onto its recent gains. We’re looking for a 0.5%q/q expansion with the consensus more like 0.7-0.8%. With the RBNZ sitting around the top-end of market forecasts (at 0.9%) we’ll have to see a significant upside surprise for markets to ratchet RBNZ OCR expectations higher.
Broad-based USD weakness again beset currency markets overnight. In fact, on a trade-weighted basis, the USD fell to the lowest level in six months.
Longer-dated US bond yields continued to slide overnight, following yesterday’s signal from the Federal Reserve that US inflation pressures are extremely benign and additional monetary stimulus may yet be required. 10-year Treasury yields slipped around 6bps to 2.52%, to be down a whopping 30bps since September 13.
Reduced yield support saw the USD weaken against most of the major currencies. Meanwhile, gold prices stormed to a record high (above US$1290/ounce) for the fifth straight session.
US-JP 2-year bond spreads hit the lowest level in a year, dragging USD/JPY from 85.20 to almost 84.40. On their own, US-JP interest rate spreads imply a USD/JPY closer to 83.00, but the ever present threat of Bank of Japan intervention is tending to limit losses in USD/JPY for now. Indeed, rumours circulated overnight that the BoJ had called local banks to ask if they will be staffed today (a national holiday in Japan).
The EUR was one of the night’s star performers, lifting from 1.3250 to 5-month highs above 1.3400. Recent EUR gains have coincided with reduced fears about European sovereign solvency. And last night’s successful Portuguese sovereign debt auction continued this theme. The close in EUR/USD above the 200-day moving average (at 1.3214) may well pave the way for further gains in the short-term.
Last night’s Bank of England MPC minutes betrayed increasing concern about the global outlook, with some members even suggesting further stimulus may be necessary. Members voted 8-1 in favour of holding interest rates at 0.5%, as expected. The more dovish-than-expected minutes ensured GBP continued to underperform while EUR/GBP climbed to a 4-month high above 0.8560.
Looking ahead, the USD index is bang on the key support line of 79.60, having already broken below the 200-day moving average of 81.90. Technically speaking, a convincing break below 79.60 would pave the way for a deeper correction back towards the 2010 lows of 76.60.
However, we suspect we’ll have to see upcoming US economic data continue to deteriorate to see speculation of further Fed easing continue to drag the USD lower. The strength of the US housing and labour markets are key in this regard. Tonight brings US jobless claims for the week ending September 18 and August existing home sales.
* Mike Jones is part of the BNZ research team.