By Mike Jones
Much like the third Ashes test, it was a wild ride in the NZD/USD last week.
The NZD certainly started the week on the front foot. Global sentiment brightened noticeably as China held off on a rumoured rate hike and the US Senate passed Obama’s fiscal stimulus package.
Global equity markets rose, our risk appetite index hit the highest since April this year, and the NZD/USD climbed above 0.7550.
But later in the week, the NZD/USD was bowled over by a broad strengthening in the USD and more uninspiring NZ economic data. Further gains in US bond yields and increased “safe-haven” demand on the back of European debt jitters bolstered demand for the USD. Meantime, local markets pushed back the timing of the first RBNZ rate hike out to July following October’s downright terrible retail sales data.
As a result, NZ-US 3-year swap spreads slipped to the lowest level since April, NZD/AUD slumped to a decade low below 0.7500, and NZD/USD was eventually dragged below 0.7400 for the first time since early October. Despite the onset of the holiday season, this week is shaping up as anything but quiet for local markets and the NZD.
The local data schedule offers plenty with Thursday’s Q3 GDP figures likely to be the highlight. We are picking a dead flat result (1.7% y/y), compared to the market’s +0.1%q/q expectation and the RBNZ’s 0.3%. The risk of a negative number certainly cannot be taken lightly.
Wednesday’s current account data will provide the curtain raiser and, again, the news is likely to be far from encouraging. We expect the current account deficit will push out to 3.5% of GDP for the year to September, from 3.0% (market 3.4%).
Should the data all pan out as we expect, there is every chance the NZD will remain heavy this week. The prospect of this week’s swathe of US data adding to the recent improving tone would provide further headwinds for the NZD/USD through a lower NZ-US interest rate differential.
It’s worth noting, NZ-US 3-year swap differentials (a indicator of the yield attractiveness of the NZD/USD) have fallen over 20bps during December as US bond yields have surged and NZ interest rates have drifted lower.
Unless we see a sustained recovery in this spread, we suspect the NZD/USD will encounter headwinds on any rallies towards 0.7500. Indeed, our short-term valuation model currently suggests a NZD/USD “fair-value” range of 0.7350-0.7550.
For today, initial support is expected on dips towards 0.7330. Resistance is eyed around 0.7420.
The USD finished last week on a strong note. Having been kick-started by a weaker EUR, Friday night’s USD gains soon became more broad-based such that most of the major currencies finished the night lower.
At their two day summit finishing on Friday, EU leaders agreed to set up a permanent bailout mechanism after the current scheme expires in 2013.
But with some investors looking for more aggressive solutions to the European fiscal crisis, the announcement failed to excite markets.
Instead, attention was focused squarely on ratings agency Moody’s five notch downgrade of Ireland, to Baa1 from Aa2.
Moody’s cited the impact on the Irish sovereign balance sheet from “repeated crystallisation of bank related contingent liabilities”.
Ireland was also put on negative outlook, meaning further downgrades are likely.
Alongside a near 20bps widening in Irish 10-year bond spreads (to 540bps above German bunds), the EUR/USD skidded from around 1.3350 to below 1.3150, before recovering slightly. Admittedly, the impact of the Irish downgrade was cushioned by fresh evidence of strength in the German economy.
Indeed, the German IFO business sentiment index soared to the highest level on record in December (109.9 vs. 109.0 expected). Nevertheless, the sliding EUR/USD soon dragged most of the major currencies lower against the USD. USD/JPY ground up to 84.20 from below 84.00 and AUD/USD fell ½ cent to around 0.9880.
However, the GBP/USD was a notable underperformer, diving around 1 cent to 1.5550. Not only did Lloyds Banking Group warn of a marked increase in provisioning on its Irish loan portfolio (which now stands at £14.4b), but UK economic worries returned to the fore as the recent run of disappointing data continued.
Nationwide UK consumer confidence fell to 45 in November, the lowest since March 2009 and well below analysts’ 52 expectation. Looking ahead, we wouldn’t be surprised to see more pain inflicted on the EUR this week.
The prospect of material good news on the European fiscal crisis appears unlikely (keep an eye on the ECB’s 3-month loan tender for a check on European banks’ liquidity reliance) while this week’s deluge of US data is likely to show US economic momentum is slowly but surely gathering pace.
The final estimate of US Q3 GDP, home sales figures, durable goods orders, personal spending data and consumer confidence will all be released.
Elsewhere, Wednesday’s Bank of England minutes and Tuesday’s Bank of Japan meeting and RBA minutes will also be of interest.
* Mike Jones is part of the BNZ research team.