By Mike Jones
Against all odds, the NZD has been the strongest performing currency over the past 24 hours. After starting the week around 0.7660, the NZD/USD jumped to almost 0.7740 overnight. Still, it hasn’t been all one-way traffic in the NZD.
Indeed, the currency spent most of yesterday afternoon on the back foot. China’s weekend hike in reserve requirements took some of the steam out of risk appetite yesterday as investors fretted about a cooling in Chinese demand. Asian equity markets dipped into the red, commodity prices eased, and investors trimmed positions in “growth-sensitive” currencies like the NZD/USD and AUD/USD.
However, after dribbling off to around 0.7670, the NZD/USD enjoyed another spurt higher overnight. The gains are a little hard to reconcile given a negative night for many of the currency’s drivers. In particular, the USD strengthened mildly, commodity prices either flat-lined or fell slightly, European equity markets posted small losses, and yesterday’s NZ food price index was marginally weaker than we were expecting. In part, strength in the NZD/USD can be attributed to sharp gains in NZD/EUR overnight.
And with US markets closed, reduced liquidity likely exacerbated currency movements. Providing headwinds for the EUR, the German finance minister expressed some reluctance to increasing the size of the European bailout fund, and an ECB official suggested markets may have overreacted to last week’s supposedly hawkish ECB statement. EUR/USD tumbled from above 1.3350 to around 1.3300, propelling NZD/EUR back above 0.5800.
Yesterday we suggested a test of NZD/USD resistance towards 0.7800 is likely this week, so long as global risk appetite remains buoyant and this week’s local data matches our robust expectations. We continue to hold this view, but wouldn’t be surprised to see a mild pull-back for today. Near-term support is eyed on dips towards 0.7680.
It’s been a mixed night in currency markets. The USD is mostly stronger, thanks to a bout of broad-based EUR selling.
Still, “commodity-linked” currencies like the AUD, CAD, and NZD all managed to post gains against the USD. Risk appetite suffered a minor set-back yesterday afternoon following Asian markets’ dour response to China’s reserve requirements hike. Renewed fears about a slowing in Asian growth momentum saw the Shanghai Composite index slide 3%, the Hang Seng fall 0.5% and the ASX 200 post a 0.7% decline. The associated pick-up in “safe-haven” demand provided modest support to the USD.
Overnight, all eyes were on Europe, with US markets closed for the Martin Luther King holiday, and the two-day European finance ministers meeting getting underway. A couple of developments provided headwinds for the EUR.
First, hopes for a significant increase in the European bailout fund tended to fade after German finance minister Schaeuble said “there is no urgent need for a decision” on the rescue fund. Speculation of a top up for the fund was one of last week’s key EUR supports.
Second, ECB rate hike expectations were pared back after ECB Governing Council member Orphanides said last week’s ECB's statement had not been "overly hawkish" and markets may have “"overreacted to the underlying message". German government bond yields ticked 2-3bps lower and the EUR/USD skidded from above 1.3350 to below 1.3300.
Looking ahead, the coming week brings plenty of event risk for currency markets. The US and European data calendars look a little quieter than last week, but investors will be looking towards Thursday’s Chinese data ‘dump’ for another test as to whether official attempts to reign in Chinese inflation pressures are impacting on growth.
The European sovereign debt situation will continue to demand attention. Spain, Greece, Portugal and Belgium are all due to auction sovereign debt this week, and more headlines from European finance ministers’ meeting are likely tonight.
We’ll also be keeping an eye on the Q4 US corporate earnings season and Wednesday’s Bank of Canada meeting. All up, we suspect further evidence of improving global growth and easing European funding concerns will keep the USD heavy this week. Near-term support on the USD index is eyed towards 78.80, while initial resistance should be found on rallies towards 80.20.
Mike Jones is part of the BNZ research team.
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