By Mike Jones
The NZD has been the strongest performing currency over the past 24 hours, for the second day running. From around 0.7800 this time yesterday, NZD/USD rocketed to within spitting distance of 0.8000 overnight.
Even on a trade-weighted basis, the currency is sitting around 29-month highs.
Yesterday’s FOMC decision got the ball rolling for the NZD/USD. Confirmation the Fed is restarting quantitative easing (QE) reinforced the downward pressure on the USD, sending most of the major currencies rollicking higher. Soon after, a surprisingly strong set of HLFS labour market figures lit a rocket under the currency. The 1.0% lift in employment in the quarter was double the 0.5% jobs growth expected by the market.
This pushed the unemployment rate down to 6.4%, lower than our (6.6%) and market (6.7%) expectations. In response, interest rate markets brought forward the timing of the next RBNZ interest rate hike to March (thereby siding with our expectations) further enhancing the yield advantage of the NZD. Indeed, NZ-US 3-year swap spreads jumped from 350bps to 26-month highs around 365bps.
Overnight, the NZD/USD continued on its path northwards as surging risk appetite bolstered demand for “growth-sensitive” currencies like the NZD and AUD.
Stock markets and commodity prices soared as investors bathed in the afterglow of the Fed’s US$600b QE policy. Global equity indices jumped 1.6-2.0%, oil prices rose 2.3%, and our risk appetite index (which has a scale of 0-100%) leapt to 71.7% – the highest since April 2010. Whether or not the NZD/USD can hold onto its recent gains will depend on how USD sentiment fares in the wake of tonight’s US non-farm payrolls report.
We suspect an undershoot of the market’s +60k jobs expectations would see a weaker USD propel the NZD/USD above 0.8000. Short-term support is eyed on dips towards 0.7890.
The USD plunged overnight, caught between the twin headwinds of sliding US bond yields and rising risk appetite, after the Fed pulled the trigger on “QE2” yesterday. Market sentiment has been cheered over the past 24 hours by yesterday’s Fed decision to buy an extra US$600b in long-term Treasury bonds in an attempt to stimulate the US economy.
Just about every asset market revelled in the promise of additional US stimulus. Stock markets soared, in many cases to flirt with 2-year highs. The FTSE, CAC 40 and DAX increased 1.8-2.0%, while US stock indices are up 1.3-1.7%. In commodity markets, oil prices jumped around 2% to 6-month highs around US$86.5/barrel, while the broader CRB commodity price index was up just over 2%. The VIX index (a proxy for risk aversion based on volatility of the S&P500) dipped from 22% to around 18.5%.
Global growth sentiment was further bolstered by more good news on the global economy. The JP Morgan Global Manufacturing PMI showed global manufacturing activity accelerating to 53.7 in October, from 52.5 in September. Buoyant risk appetite and surging equity markets encouraged investors to trim positions in “safe-haven” currencies like the JPY and USD, in favour of EUR, CHF, GBP, and AUD. USD sentiment was further knocked by another slide in US bond yields. 10-year Treasury yields fell around 8bps to below 2.5% after a surprise increase in US jobless claims (457k vs. 442k expected).
There were relatively few surprises from last night’s ECB and Bank of England meetings. Both left their key policy rates unchanged, with the BoE also leaving untouched its £200b asset purchase scheme. The confirmation of no extra QE measures from the BoE saw GBP/USD surge from around 1.6150 to nearly 1.6300. It’s worth noting, the Fed’s extra easing measures drew criticism from several quarters overnight.
This mostly reflects the likelihood the globe will now have to deal with a weak USD for longer. The Brazilian finance minister said “it does no good at all to just throw dollars from a helicopter" while an advisor to the PBOC said “the occurrence of another crisis is inevitable”.
The German and French economy ministers didn’t sound too impressed either. Looking ahead, whether or not the USD continues its slide will depend on the strength of tonight’s non-farm payrolls employment report. We suspect a weaker number than the 60,000 gain expected will see markets speculate on QE3, dragging the USD lower.
* Mike Jones is part of the BNZ research team.