By Mike Jones
Since our last report on Christmas Eve, the NZD has marched higher. In fact, the NZD/USD has been the strongest performing currency.
Between Christmas and New Year the NZD/USD climbed from 0.7500 to above 0.7700, NZD/EUR surged to 3½ highs above 0.5800 and NZD/GBP rose above 0.5000 for the first time since June 1979.
Much of the NZD’s strength over this period reflects a surge in commodity prices. Copper prices jumped to a fresh record high, oil prices rose above US$92.50 for the first time since October 2008, and the CRB index (a broad index of commodity prices) climbed to 26-month highs.
Last night’s Fonterra milk price auction carried on the theme of commodity price strength. Prices increased 7.1% from the last auction, to be just 3.5% below the April 2010 peak. The strong result added impetus to the squaring of NZD/AUD short positions that has squeezed NZD/AUD higher over the past week or so. NZD/AUD has surged over 2% since Christmas Eve, with the drag on the AUD from the impact of the Queensland floods also contributing.
It’s worth noting, part of the NZD’s strength over the holiday period likely reflects year-end positioning and whippy holiday-thinned markets. However, as liquidity returns and fundamentals begin to reassert themselves we wouldn’t be surprised to see a mild downward correction in the currency.
Indeed, according to our short-term valuation model, recent gains have left the NZD/USD looking a tad overstretched. Our model currently suggests a NZD/USD “fair-value” range of 0.7350-0.7550, suggesting there is little ‘fundamental’ reason for the currency to sustain rallies above 0.7750 in the short-term. For today, the backdrop of a firmer USD and softer equity markets means headwinds are expected ahead of 0.7730. Near-term support is eyed towards the overnight low of 0.7635.
Majors
The USD has started 2011 on the front foot. A string of upbeat US economic news bolstered optimism about the US recovery, bringing to a halt the decline in the USD seen over the Christmas/New Year period.
The Chicago PMI smashed expectations, the ISM manufacturing index rose to the highest level in 7 months, November pending home sales jumped 3.5%m/m, and a fall in jobless claims (to 388k) buoyed hopes of a sustainable recovery in private sector hiring. Overnight, the good news continued as November factory orders recorded an unexpected increase (+0.7%m/m vs. -0.1% expected).
The firmer USD has served to knock many of the major currencies from their end-2010 highs. EUR/USD has dipped from above 1.3400 to around 1.3300, USD/JPY has climbed from below 81.00 to above 82.00 and GBP/USD is a smidge below its New Year’s Eve peak of around 1.5650. Still, the most noticeable correction has been in the AUD. After surging to a fresh 28-year high of around 1.0250 on Friday, the AUD/USD has since skidded below 1.0050 reflecting in part the impact of the Queensland floods.
Risk appetite is starting the year on a generally firm note, which has acted to limit gains in the “safe-haven” USD somewhat. Global equity markets ground higher over the festive season – capping off a year which saw the MSCI World Equity Index finish up 9.5%. Along with encouraging US data, strong manufacturing data out of the UK and Eurozone have also helped underpin equity market sentiment. The S&P500 is up 0.5% so far in 2011 while the DAX is up about 0.9%.
Commodity prices have been volatile through the holiday period. A surge in prices through the Christmas/NY period helped ‘commodity currencies’ like the AUD and NZD outperform (oil prices and the CRB index rose to 26-month highs). However, commodity prices fell sharply overnight. Oil prices slipped 2.9% to around US$89/barrel while the broader CRB index is off around 2%.
While changes in market positioning and low liquidity have spurred often skittish trading in currency markets of late, conditions should begin to normalise over the next week or so as traders return from holiday. There are also some important events to watch out for that might help shape USD sentiment. Most notable in this regard will be Friday’s non-farm payrolls US employment report (+140k jobs expected) and Fed Chairman Bernanke's testimony to the Senate.
Mike Jones is part of the BNZ research team.
All its research is available here.
No chart with that title exists.
11 Comments
What a nice xmas present for those who moved their loot back from aus when it sat below 75............will we see a climb back to circa 80 over the coming months..probably. Count on the RWC helping out with that and if the govt bothers to make a public start on pulling back the fiscal splurge....and if Bolly gives in with games and begins to reward savers.....hell it might even get to 85au.
The cross rate between the $US / and the $Kiwi intrigues me . If Cranky Bernanke's printing press fails to debase the Yankee-Doodle dollar much further , will it rise . Could be a nice currency play with the $Kiwi , and a good reason to short gold ( heavens-to-Murgatroyd , wash out the Gummy gob ! ) .............. And the Euro , so beloved in early 2010 by the experts ............ gurgle gurgle ...........pssssssst .
"The worst flooding in half a century in Australia’s northern state of Queensland may have a “significant impact” on the nation’s economy as exports are interrupted, said central bank board member Donald McGauchie. "
This helps explain the change in the kiwi/au cross. How high will Kiwi go?
JB... That is how it is supposed to be ... kind of. ( My understanding is that the exchange rate should fluctuate , with the result being balanced trade.
Likewise with interest rates... The "Natural rate" of interest is where the demand for loans is balanced by the supply of savings ( deferred consumption )
You can see how the current system has structural imbalances, from the manipulation of interest rates, exchange rates and the money supply, which has brought us to the problems of today.
When it comes to interest rates, money supply, credit, and exchange rates... I think the Austrian school of economic thinking has the best explanations.
Check this link out...This guy is very good : ... he perfectly defines the problems, and even has some solutions. ( It all stems from the breakdown of Brenton Woods in 1971 )
http://www.richardduncaneconomics.com/about-this-blog/
The distortions in the commodities markets caused by Bernanke's money printing mean it is almost impossible to accurately determine forward demand for any commodity. This is made worse when a commodity can be stored. Copper has a permanent shelf life..who knows how long milk powder will last under ideal conditions. Buyers can stack wool away for decades.
The situation is serious when the market price distortions are taken as accurate predictors and lead to suppliers boosting investment in production. If the distortion remains in place long enough, supply may be outstripping normal consumption demand and then the entire supply chain has entered a danger zone unawares.
Come the day when Bernanke is fired or replaced and the cheating fed brought into line, ie the money printing stops and the real depression starts, bang goes the price floor on most commodities. Copper could revert to $3 almost overnight. What will happen to milk powder. Those storing commodities will take a haircut until prices climb again...an unknown factor and the time may be so long that commodities become rubbish...anyone for fifty year old cans of beans!( leading to massive fraud)
However...the suppliers of some commodities will take more than a haircut. Mines that did not borrow to boost output will simply close or reduce output. Farmers who borrowed to extend and boost milk supply are set to be clobbered and the extent of the bashing will be determined by the drive to restore market trust in paper currency. This may be a trend lasting twenty years. Or more.
As well it is necessary to try to measure the likely change in demand resulting from a major market downturn. If China goes pear shaped, what happens to food demand!.
There are so many variables not being looked at by anyone supplying a commodity. Lost in the headlines is the fact that Bernanke and the fed crooks are deliberately jacking up the equity prices to create a false sence of wealth creation in the US....the market is complete and utter shit whichever way you look at it.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.