By Mke Jones*
New Zealand’s Q2 GDP outturn was unequivocally soft. At 0.2% for the quarter, growth was well shy of markets’ 0.8% expectation and even south of our bottom-of-the-market 0.5% view.
Importantly, the shortfall could not be ascribed to anything unusual but, simply, a generally weaker picture across-the-board than expected. The data was certainly confirmation, if any more was needed, that the NZ recovery is a slow and bumpy one.
So it wasn’t surprising to see the NZD lose some of its sparkle yesterday. The NZD/USD skidded from 0.7380 to almost 0.7320 in the immediate wake of the data.
Renewed interest from leveraged and short-term speculative accounts to add to short NZD/AUD positions simply added to the weight on the NZD yesterday.
The woeful GDP data reinforces the outperformance of the Australian economy and NZ-AU 2-year swap rates tumbled to fresh all time lows below -150bps yesterday.
We have been looking for NZD/AUD to slide lower in recent weeks; the current interest rate outlook suggests the downtrend has further to run in the short-term.
Overnight, the USD finally found some friends, ensuring bounces in NZD/USD were limited to the 0.7340 region. Not only was speculation about Fed easing tempered, but a paring of investors’ risk appetite bolstered demand for “safe-haven” currencies like USD, JPY and CHF.
Our risk appetite index (which has a scale of 0-100%) slipped to 52.7%, from as high as 58.4% at the start of the week.
Looking ahead, repeated failures by the NZD/USD to sustain rallies towards 0.7395 suggest the NZD/USD uptrend may be running out of steam, although momentum is still positive for now.
The upper band of the NZD/USD “fair-value” range implied by our short-term NZD/USD valuation model is also sitting at 0.7400.
This suggests for NZD/USD to sustain rallies above 0.7400 we’ll have to see either a re-widening in NZ-US 3-year swap spreads or further gains in equity markets and risk appetite.
The recent slide in the USD stalled overnight. Not only was speculation about Fed easing tempered, but a paring of investors’ risk appetite bolstered demand for “safe-haven” currencies like USD, JPY and CHF. After climbing steadily for most of the week, the EUR/USD rally was stopped in its tracks.
Growth concerns flared up following a disappointing read on September Eurozone PMIs (composite measure 53.8 vs. 55.7 expected) and a terrible Irish GDP outturn (-1.2%q/q in June vs. 0.4% expected). Adding to the EUR’s woes was market chatter suggesting Anglo Irish Bank may default on some of its debt repayments.
Irish sovereign CDS (a proxy for default probability) surged to record highs around 470bps.
Across the Atlantic, sentiment was a touch more upbeat. US data came in fairly close to analyst expectations, on balance. Jobless claims unexpectedly jumped from 450,000 to 465,000, offset by slightly better-than-expected existing home sales data for (7.6%m/m vs. 7.1% expected).
Meantime, a prominent Fed watcher dampened speculation additional quantitative easing from the Fed was imminent. US 10-year bond yields recovered from 2.48% to almost 2.56%, helping shore up sentiment towards the USD. Reflecting these differing fortunes, EUR/USD slipped from 1.3400 to an overnight low of nearly 1.3350.
Similarly, GBP/USD struggled early in the night amid further speculation more quantitative easing is likely from the Bank of England. However, the GBP/USD later recovered to 1½ month highs around 1.5700 amid heavy EUR/GBP selling from real money accounts.
Global stock markets spent the night under pressure, as global growth concerns and percolating fears about Europe’s banking sector weighed. European equity indices dipped 0.1-0.7%, while the S&P500 clawed back early losses to finish the night around flat.
The lacklustre equity market performance bolstered demand for “safe-haven” currencies like JPY, USD and CHF. At around 84.50, USD/JPY has now unwound around half of its post-BoJ intervention gains. What’s more, US-JP 2-year bond spreads remain around 21-month lows and, on their own, imply a USD/JPY closer to 83.00.
Clearly, the BoJ’s task to prevent further JPY strength is becoming more difficult. Looking ahead, we’re inclined to think support on the USD index around 79.60 can hold in the near-term. Event risk will come from tonight’s German IFO and US durable goods orders and new home sales for August.
*Mike Jones is part of the BNZ research team.