By Mike Jones
After opening the week around 0.7460, the NZD/USD surged around a cent overnight, reflecting the tailwinds of rising commodity prices and buoyant global risk appetite. Financial market sentiment brightened noticeably overnight.
The fact that China appears to be holding off on interest rate hikes (in favour of increases in bank reserve requirements) saw investors heave a collective sigh of relief.
Meanwhile, in the US, growth expectations were bolstered by speculation President Obama’s tax package would be passed in the Senate. Global equity markets posted gains of 0.3-0.8% and our risk appetite index (which has a scale of 0-100%) increased to 75.4% – the highest since April this year. The more upbeat global sentiment was also reflected in rising commodity prices.
The CRB index (a broad index of global commodity prices) increased over 1%, copper prices reached a new high and gold prices ticked up 0.7% to nearly US$1400/ounce. Improving risk appetite and commodity price gains bolstered demand for “growth-sensitive currencies like the NZD and AUD, at the expense of “safe-haven” currencies like the USD and JPY.
NZD/JPY climbed from 62.70 to nearly 63.30 and NZD/USD was dragged up to 0.7570. Absent a major local surprise (watch out for today’s retail and REINZ data due at 10:45am and 10:00am respectively), direction for the NZD is expected to come from offshore this week.
Keep an eye in particular on Wednesday morning’s FOMC meeting which is shaping up as a key determinant of USD sentiment in coming weeks. It’s worth noting, last week’s fall in relative interest rate differentials has shaved around 1½ cents of the “fair-value” range implied by our short-term NZD/USD valuation model.
The model now estimates a fair-value range of 0.7350-0.7550, suggesting little fundamental reason for the currency to sustain rallies above 0.7600 in the short-term.
The USD was pummelled overnight as rising risk appetite sapped demand for “safe-haven” currencies like the USD and JPY. The USD index slipped around 1% to 79.40. Financial markets have kicked off the week in a generally positive frame of mind.
Indicative of such, Asian stock markets recorded modest gains yesterday after the PBOC decided not to raise interest rates over the weekend, choosing instead to hike banks’ reserve requirements as a more targeted response to rising inflation pressures. The Shanghai composite index jumped 2.9%, the Nikkei rose 0.8% and the Hang Seng was up 0.7%. European and US stock markets soon joined in the renewed cheer.
Not only did large acquisitions by GE and Dell buoy hopes M&A activity was on the rise, but market chatter suggested President Obama’s tax deal would likely win passage through US congress. European equity indices rose 0.3-0.8%, while the S&P500 edged up 0.4% to the highest level since September 2008.
The VIX index (a proxy for risk aversion) slipped from 17.5% to 8-month lows a smidge below 17%. Easing fears about a sharp slowing in Chinese growth also underpinned commodity prices overnight. The CRB index increased 1.2% while copper prices hit a fresh all-time high. Renewed appetite for risk and generally buoyant equity markets encouraged investors to ditch “safe-haven” currencies like the USD and JPY in favour of “growth-sensitive” currencies like EUR and AUD.
Sentiment towards the USD was further dented by comments from ratings agency Moody’s who said the US tax package increases the chances of a negative outlook being placed on the US AAA rating in the next two years. From around 1.3200, EUR/USD was propelled to nearly 1.3400 while AUD/USD climbed around 1c to 0.9950. In contrast, GBP tended to underperform after Bank of England deputy governor Bean cautioned the BoE could yet restart its quantitative easing (QE) programme.
Wednesday morning’s FOMC meeting will probably be the highlight of this week’s event calendar. Indeed, the Fed’s comments around QE purchases and the recent improvement in US economic outlook will be critical to whether the USD can continue to rally. Should the Fed indicate it is now less likely to fully implement its QE plans, we wouldn’t be surprised to US bond yields extend their recent gains and the USD index test resistance towards 80.50. Short-term support is eyed around 79.00.
* Mike Jones is part of the BNZ research team.