Rising commodity prices boost NZ dollar to near 75 USc despite weak GDP figures; Oil over US$91/bbl

By Mike Jones

Ouch! We were holding our breath going into yesterday’s Q3 GDP release, fearing it might print negative. Unfortunately, it did. The economy contracted 0.2% in the third quarter, following a downwardly revised 0.1% expansion in Q2.

Clearly the economy was shuffling sideways at best, through the middle part of the year. Barring the psychological set-back of the economy actually contracting again, it did not come as a major surprise.

We were expecting a flat result and the consensus pick was +0.1%. The lack of surprise was clear from the mildest of reactions in both currency and interest rate markets. Swap rates ticked down a few points across the curve, while the NZD/USD and NZD/AUD both shed around 30 points.

However, the dip in the NZD proved to be extremely short-lived.

Solid real money and commercial appetite for NZD/AUD and NZD/EUR underpinned a strong bounce in the NZD/USD, as did a vicious unwinding of short positions by short-term speculative and leveraged players.

Before long, the NZD/USD had climbed back above its pre-GDP levels around 0.7430.

Overnight, the NZD/USD continued its ascent. Trading was fairly listless overall, but a generally solid batch of US data and further strength in global commodity prices ensured “growth-sensitive” currencies like the NZD and AUD outperformed.

Indeed, the NZD/USD was the strongest performing currency of the night, climbing to an overnight high of nearly 0.7500.

The CRB index (a broad index of global commodity prices) rose 0.4% and oil prices surged 1.2% to a fresh 27-month high above US$91/barrel.

For today, the backdrop of a generally heavy USD and firm commodity prices should ensure NZD/USD finds support towards 0.7430. Expect some initial headwinds ahead of 0.7520.

However, be mindful that thin holiday trading conditions can exaggerate price action and we may see a bit of volatility over the Christmas-New Year period.

See you in 2011!

Majors

The USD weakened against most of the major currencies overnight. However, with markets well and truly in wind-down mode ahead of the festive season, liquidity was thin and conviction generally lacking.

For a change, the JPY led last night’s gains against the USD.

Market chatter of year-end repatriation flows helped bolster JPY sentiment.

In addition, last night’s slew of US data came in marginally on the softer side of expectations, undermining the USD to some extent.

From around 83.60 at the start of the night, USD/JPY skidded to around 82.90. US durable goods orders declined 1.3%m/m in November (-0.5% expected), the core PCE deflator rose by less than expected (0.8%y/y vs. 0.9% expected) and November new home sales undershot expectations by a small amount (5.5%m/m vs. 6.0% expected). Still, US bond yields mostly increased – 10-year Treasury yields ticked up 4bps to 3.39% – likely reflecting concerns about increasing supply.

The US Treasury announced overnight it will auction US$99b worth of bonds next week. The EUR spent the night contained in the familiar 1.3060-1.3150 range. Ratings agency Fitch downgraded Portugal’s sovereign rating from AA- to A+, briefly knocking the single currency towards the bottom end of the range. However, Chinese officials again expressed support for the Eurozone, helping to keep EUR sentiment underpinned.

A Foreign Ministry spokeswoman said China would support the IMF in providing a bailout for the region (if necessary) and the region was one of the most important areas for China’s FX reserves. A string of generally downbeat UK data has kept the GBP trading heavily in recent days.

While there wasn’t any new data out overnight, UK growth worries continue to simmer after the Bank of England’s Fisher said the UK economy could suffer another contraction next year. GBP/USD slipped from 1.5430 to 1.5380 before recovering slightly as the night wore on.

There was relatively little action in global stock markets overnight. Most indices were either flat or down slightly on the day, as stocks continued to hover around 2-year highs. Still, oil prices shot to a fresh 27-month high above US$91 barrel. Prices have soared almost 9% in December reflecting not only unseasonably cold weather in the US but also declining global inventories.

Looking ahead, don’t be surprised to see more choppy and rangy price action through the Christmas and New Year period as volumes continue to thin out. Fundamentals should begin to reassert themselves from early in 2011.

* Mike Jones is part of the BNZ research team. 

All its research is available here.