By Mike Jones*
Against a broadly weaker USD, the NZD/USD climbed to a fresh 11-month high above 0.7500 overnight.
The battered and bruised USD took another knock overnight, as talk of additional monetary stimulus continues to undermine the currency.
A weak reading on the US labour market from the September ADP employment report quashed hopes for a solid non-farm payrolls report on Friday. And the Fed’s own Evans (Chicago Fed President) suggested “much more” stimulus is needed.
US interest rates plunged, in the case of the 2-year Government bond yield to all-time lows around 0.38%. As a consequence, investors ditched the USD in favour of higher-yielding currencies like the EUR, AUD and NZD.
Sliding US interest rates saw NZ-US 3-year swap spreads widen to 2-month highs around 315bps overnight, and the extra yield advantage helped underpin last night’s NZD/USD gains.
The only currency not to feel the impact of the softer USD was the GBP, reflecting speculation the Bank of England may join the Fed in restarting quantitative easing this year.
With GBP/USD trapped in a sideways 1.5840-1.5940 range, NZD/GBP was propelled from 0.4690 to nearly 0.4750 overnight.
Looking ahead, NZD/USD is starting to look overextended on the basis of NZ ‘fundamentals’ (our short-term valuation model implies a 0.7250-0.7450 “fair-value” range).
This raises the risk of a near-term pull back. However, positive momentum and widening NZ-US interest rate differentials mean we suspect we’ll see further gains first, and solid NZD/USD demand is expected on any dips.
For today, initial support on NZD/USD is eyed around 0.7445. Keep an eye out for the ever-volatile Australian employment data due out at 1:30pm (NZT). A 20,000 jobs gain is currently expected.
Majors
Similar themes prevailed in currency markets overnight. The USD continued to tumble, providing a default lift to most of the major currencies. Bearish USD sentiment was reinforced by more talk the Fed will have to restart quantitative easing later this year to revive the flagging US recovery.
Not only did a decidedly grim US ADP employment report reveal a loss of 39,000 jobs in September (+20,000 expected), but Chicago Fed President Evans (a non-voter) said “much more” monetary easing is necessary.
Reflecting these factors, US bond yields plunged, dragging the USD lower. Ten year US Treasury yields fell 11bps to 2.35% – the lowest since January 2009. Meanwhile, 2-year yields slumped to fresh all time lows around 0.38%.
Against the broadly weaker USD, the JPY was propelled to fresh 15-year highs. We have noted that falling US-JP bond yields represent a sizeable impediment for the Bank of Japan’s attempts to weaken the JPY. And, indeed, last night’s slide in USD/JPY was accompanied by a 22-month low in US-JP 2-year bond spreads (of around 25bps).
EUR sentiment was buoyed not only by the weaker USD but also a 3.4%m/m jump in August German factory orders (0.9% expected). These positive influences more than offset the impact of simmering sovereign debt tensions (ratings agency Fitch downgraded Ireland’s sovereign rating one notch to A+ overnight), and EUR/USD made a new 8-month high above 1.3900.
The CAD was one of the night’s star performing currencies, thanks to a stellar September PMI (70.3 vs. 62.0 expected). From around 1.0160, USD/CAD dived to nearly 1.0060 in the wake of the data – the lowest since April.
It’s worth noting that, as the USD continues to slide, tensions about global “currency wars” are beginning to heat up ahead of this weekend's semi-annual IMF meeting.
This follows rumoured intervention by numerous Asian central banks to stem gains in their currencies and Brazil’s recent move to increase taxes on foreign investment.
Overnight, US Treasury secretary Geither lambasted “emerging economies that both remain undervalued and are leaning heavily against appreciation”.
IMF chief Strauss-Kahn also cautioned against using exchange rates as a “policy weapon” yesterday, suggesting such "would represent a very serious risk to the global recovery."
All the while, China continues to rebuff calls its currency is overvalued.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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