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.
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