By Mike Jones
The NZD/USD has shed close to a cent over the past 24 hours, falling from 0.7520 to around 0.7420. In doing so, the NZD took out the title of weakest performing currency.
A broadly stronger USD has been the main theme in currency markets over the past 24 hours. Yesterday morning’s FOMC statement contained few surprises. The Fed’s cash rate and quantitative scheme were both left unchanged as expected. But the Fed’s failure to express concern over the recent surge in US interest rates saw US bond yields continue to press higher in the wake of the release, imparting fundamental support to the USD.
Overnight, the USD extended its gains. Not only did European debt jitters encourage “safe-haven” demand, but US industrial production and manufacturing figures exceeded analyst expectations. Before long, the broadly stronger USD had shaved around a cent off all of AUD/USD, EUR/USD and NZD/USD.
However, there were a couple of extra negatives in the mix for the NZD. First, NZD/AUD fell below 0.7500 for the first time since 2000, amid ongoing selling interest from momentum and speculative type players. Second, NZ-US 3-year swap spreads slipped to the lowest level since April, undermining yield support for the currency.
Not even a solid result from last night’s Fonterra milk price auction could prop up the ailing NZD. Prices rose 2.4% relative to the previous auction, supportive of Fonterra’s recent decision to lift its milk price forecast to $6.90/kgms.
We said early in the week that sliding NZ-US interest rate differentials suggest NZD/USD will struggle to sustain rallies above 0.7600 in the short-term. We continue to favour the downside in the near-term. Look out for a daily close below 0.7400. Technically speaking, this would signal the emergence of a new downtrend.
For today, keep an eye on local event risk in the form of the December NBNZ business survey and Westpac consumer confidence survey.
The USD strengthened against most of the major currencies overnight, reflecting both upbeat US data and increased “safe-haven” demand.
The reaction to yesterday morning’s FOMC statement was unusually subdued. In some ways this was not surprising given the statement looked essentially like a reprint of November’s missive.
The FOMC again expressed concern over high unemployment and the “trend down” in US core inflation. The Fed’s cash rate and US$600b asset purchase programme were kept unchanged as a result. Still, US bond yields continued to climb in the wake of the statement, perhaps reflecting the Fed’s failure to acknowledge the near 90bps surge in yields since the last statement. 10-year Treasury yields hit a 7-month high around 3.5%.
Overnight, worries about European debt strains returned to the fore. European stocks and the EUR fell after ratings agency Moody’s placed Spain’s Aa1 rating on review for a possible downgrade. Moody’s cited concern about rising Spanish borrowing costs and potential losses in the banking system.
Some good news on Europe limited the fallout. Parliamentary support for Ireland’s €85b EU-IMF bailout was confirmed and Portugal successfully issued €500m of short-term debt. EUR/CHF fell to a fresh all-time low around 1.2760, helping drag EUR/USD from above 1.3350 to around 1.3270. Meanwhile, European stocks recorded declines of between 0.2% (UK) and 1.5% (Spain).
But it wasn’t just EUR on the back-foot. A broadly stronger USD knocked most of the major currencies lower. Indeed, USD/JPY rose from 83.70 to almost 84.10. Not only did equity market weakness encourage “safe-haven” demand, but last night’s US data was actually fairly encouraging.
Industrial production rose 0.4% in November (0.3% expected), core inflation came out broadly as expected, and the New York Empire manufacturing index jumped from -11.14 to +10.57 in December (+5 expected). Having initially been dragged lower on “safe-haven” buying, US bond yields reversed course to end the night broadly unchanged.
Looking ahead, investors’ focus looks set to remain on Europe. European PMIs and UK retail sales will be released tonight. But the bigger event risk will come from a European leaders meeting. Investors are hopeful fresh steps to tackle the European debt crisis will be announced.
* Mike Jones is part of the BNZ research team.