By Mike Jones
The NZD lost a little more of its lustre overnight. Broad-based gains in the USD carved around ½ cent off the NZD/USD, such that it ended the night around 0.7620.
All eyes were on US markets overnight amid more evidence the US economic recovery is slowly gathering pace. A blockbuster ADP employment report saw analysts scramble to revise up forecasts for Friday’s all-important non-farm payrolls report, while the US ISM non-manufacturing index also comfortably exceeded expectations (57.1 vs. 55.7 expected).
US bond yields reclaimed all the ground lost over the past few days, lighting a rocket under the USD. Against the broadly stronger USD, EUR/USD was knocked from above 1.3250 to around 1.3150, AUD/USD briefly fell below parity, and the NZD/USD slipped from 0.7670 to almost 0.7600.
Still, with commodity markets still revelling in New Year’s cheer, “growth-sensitive” currencies like the AUD and NZD held up better than most. As a result, NZD/EUR again flirted with 0.5800 and NZD/GBP ground up to nearly 0.4930.
We suspect part of the NZD’s strength over the holiday period 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. A quick glance at the ‘fundamentals’ tends to support this stance. Reflecting surging US yields, NZ-US 3-year swap spreads have dived below 280bps. Historically, NZ-US interest rate differentials around these levels have coincided with a value of the NZD/USD well below 0.7500.
Our short-term valuation model also suggests the NZD/USD is looking overstretched. Our model currently estimates a NZD/USD “fair-value” range of 0.7350-0.7550, suggesting there is little ‘fundamental’ reason for the currency to sustain rallies above 0.7700 in the absence of a marked increase in NZ-US 3-year swap spreads.
Majors
The USD strengthened against most of the major currencies overnight as upbeat economic data stoked optimism about the US recovery.
Not only did the ADP survey reveal jobs growth in December was roughly triple analyst forecasts (297k vs. 100k expected), but the US service sector expanded at its fastest pace since 2006 in December according to the ISM non-manufacturing index (57.1 vs. 55.7 expected).
Fresh evidence the US recovery is gathering momentum saw US bond yields continue to rise, underpinning broad-based gains in the USD. From around 0.6%, 2-year US Treasury yields surged 10bps to 0.7%, while 10-year yields jumped almost 15bps to 3.45%.
Reflecting the stronger USD, USD/JPY climbed from 82.00 to almost 83.30, GBP/USD tumbled from above 1.5600 to below 1.5500, and EUR/USD skidded from above 1.3250 to around 1.3150.
A mild flaring of European sovereign debt concerns also provided headwinds for the EUR. Last night’s closely watched sovereign bond auctions went relatively smoothly. Germany sold €3.9b worth of bonds and Portugal raised €500m.
However, rising Portuguese funding cost (3.68% for 6-month paper, compared to 2.0% in September and 0.6% a year ago) raised fears over its ability to continue to service its debt. As a result, selling of EUR crosses again took hold. NZD/EUR and AUD/EUR extended their recent gains and EUR/GBP slipped from 0.8540 to around 0.8500.
New Year’s optimism continued to wash through equity and commodity markets overnight, no doubt helped by the encouraging US data.
Oil prices rose 1.2% to US$90.5/barrel, while the broader CRB commodity price index lifted 0.6%. Meanwhile, after a stuttering start, US stock indices finished the night 0.5-0.6% higher. As a result, “growth-sensitive” currencies like CAD, AUD and NZD tended to hold up the best against the broadly stronger USD.
Looking ahead, whether or not the USD can extend its recent gains will depend on a couple of key events. In particular, Friday’s non-farm payrolls US employment report (+140k jobs expected) will hold important clues as to whether the US labour market is improving in the manner the Fed desires, and Fed Chairman Bernanke is due to testify before the Senate, also on Friday.
Mike Jones is part of the BNZ research team.
All its research is available here.
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6 Comments
Some time ago - when NZ was in talks of a trade agreement with the USA- the IMF said that NZD's fair value was 55 cts... By the time QE is behind and the USD regains traction as the safe haven currency it would not be surprising to see it there. I think that the IMF's price estimate for the Aussie was something like 77 cts. So after all 2011 could bring a big shift in the forex mkt. Be ready and not biased.
Hmmmmmmmm....not so sure the yanky dollar will ever recover M.......QE2 will be followed by QE3 then 4 then........
That country is now in a state of decline...bit like the British Empire circa 1946.
Bernanke will get the bum's rush and some unfortunate sod will land the job of bashing some austerity into the govt splurge.....that plus a decline in real incomes to where they were thirty years ago....hell that would be a pay rise for many.
Oww Woll,I forgot!Weve got the World Cup this year,and everyones going to fleece the tourists ae!!What will that do for our image,already words out in Pommania and Eurocloud that were to dear.thats why they are going to Canada.
And ,did you catch the news about food prices.They want to try and live here,he he.
Well it is only one of the many trading ideas for the year, I give it some credence only because I think that both China and the US can not grow at the same time so if China is steping on the brakes it might open the door for the US growth with a stronger dollar and cheaper commodities. Lets wait and see what the Australian floods will do to the Chinese economy.
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