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Hopes for US recovery help boost commodity prices and currrencies linked to commodities, including NZ dollar

Hopes for US recovery help boost commodity prices and currrencies linked to commodities, including NZ dollar

By Mike Jones

The NZD has been the strongest performing currency over the past 24 hours. Nevertheless, currency movements in general were pretty lacklustre overnight. The NZD/USD climbed from 0.7360 to around 0.7420.

As with Friday night, selling of EUR and EUR crosses was the dominant theme in currency markets overnight. EUR/USD shed around ½ cent and EUR/AUD and EUR/CHF fell to fresh all time lows as investors continued to fret about the fiscal health of the Eurozone.

Chatter about a possible downgrade of France’s AAA rating was the latest in a steady steam of negative news.

Nevertheless, the NZD managed to shrug off all the downbeat sentiment. Modest gains in global commodity prices bolstered demand for “commodity-linked” currencies like the NZD and AUD, forcing speculative accounts to square up short positions.

Solid real money buying of NZD/EUR also underpinned the currency. NZD/EUR raced up from 0.5580 to nearly 0.5660, helping drag NZD/USD up to an overnight high of nearly 0.7430. 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 for the quarter (1.7% y/y).

Should the data all pan out as we expect, there’s every chance the NZD will remain heavy this week.

It’s worth noting, NZ-US 3-year swap differentials (an indicator of the yield attractiveness of the NZD/USD) have fallen over 20bps during December. 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 0.7440.

Today’s November migration and credit card figures should be relatively uneventful, but keep an eye on the December RBA Board minutes due at 1:30pm (NZT).

Majors

It has been a quiet start to the week in currency markets. Movements in the major currencies were relatively subdued overnight as volumes and conviction begins to wane in the lead-up to Christmas. Still, familiar themes prevailed.

While risk appetite overall remained fairly healthy, a mild sell-off in the EUR/USD paved the way for a slightly firmer USD. European sovereign bond spreads continued to press higher, indicative of rising fears about the fiscal health of the region. Most notably, the spread between 10-year Irish and German government bonds widened 20bps to 560bps.

Not only did a Bloomberg news article suggest France risks losing its AAA rating, but the ECB expressed “serious concerns” that Ireland’s bailout package could affect its liquidity operations. Last night’s data didn’t do the EUR any favours either. Eurozone consumer confidence fell from -9.4 to -11.00 in December (-9.0 expected).

Widespread real money selling of EUR and EUR crosses saw EUR/USD drift off to around 1.3120, from closer to 1.3180 this time yesterday.

Meanwhile, EUR/CHF and EUR/AUD tumbled to fresh all-time lows below 1.2650 and 1.3200 respectively. There was relatively little reaction to the escalation in tensions on the Korean peninsula. South Korea proceeded with military drills, but North Korea said it would not react to such, despite earlier threats.

Rising tensions scuttled sentiment in Asian stock markets yesterday (the Shanghai index slipped 1.4%), but European and US equity markets managed to creep into the black overnight.

Firm equity markets, combined with modest gains in commodity prices saw “growth-sensitive” currencies like the AUD and NZD outperform overnight. The CRB index (a broad measure of commodity prices) rose 0.7% and oil prices lifted around 0.3% to US$88.30/barrel.

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 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 US consumer confidence will all be worth watching in this regard.

Elsewhere, Wednesday’s Bank of England minutes and this afternoon’s Bank of Japan meeting and RBA minutes will also be worth keeping an eye on. Short-term support on EUR/USD is eyed towards the November 1.2960 low.

* Mike Jones is part of the BNZ research team. 

All its research is available here.

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