By Mike Jones
The NZD lost a little of its lustre overnight. From around 0.7730 this time yesterday, the NZD/USD dribbled off to around 0.7700 overnight.
Yesterday’s REINZ data for December revealed a housing market still very much in the doldrums. December’s home sales, of 4,397, implied pretty much no change from November on a seasonally adjusted basis. The level, overall, remains very low, consistent with ongoing modest downward pressure on prices.
The dreary data contributed to a 3-4bps dip in short-dated swap yields yesterday. The associated contraction in NZ-US 3-year swap spreads (to 291bps from closer to 300bps at the start of the week) has weighed on the NZD/USD over the past 24 hours.
The overnight session was all about gains in EUR and GBP as encouraging European economic data saw markets tentatively bring forward the expected timing of ECB and Bank of England rate hikes. Heavy selling of NZD/GBP and NZD/EUR helped drag NZD/USD from an overnight high of 0.7740 to closer to 0.7700 by the end of the night.
Still, we don’t foresee further substantive declines in NZD/EUR and NZD/GBP in coming months. While inflation concerns in the UK and Eurozone have flared up of late, the relatively brighter NZ economic outlook should keep NZD/EUR and NZD/GBP supported on dips towards 0.5550 and 0.4700 respectively.
We expect calendar year (annual average) growth of 3.4% for NZ, far stronger than the 2.0% expected for the UK and the 1.5% expected for the Eurozone. For today, there are no local or Australian events to watch out for.
Should Asian equities follow the generally positive lead from US and Europe, we’d expect some support for the NZD/USD to emerge during the day. Key support will be found on dips towards 0.7680 with initial resistance towards 0.7745.
The USD weakened against most of the major currencies overnight. Solid gains in EUR and GBP mostly paved the way for a broadly weaker USD. Not only did healthy appetite for EUR and GBP from sovereign accounts help prop up the European currencies, but last night’s economic news was fairly supportive as well.
December quarter UK inflation figures exceeded already robust expectations (3.7% vs. 3.4% expected), albeit partly boosted by December’s freezing weather. Nevertheless, rising inflation worries saw investors bring forward the expected timing of the first Bank of England rate hike to June (closer to our view of May), spurring modest gains in short-dated UK bond yields. GBP/USD rose from 1.5900 to 2-month highs above 1.6000 as a result.
Not to be outdone, EUR/USD shook off lingering sovereign debt concerns, climbing briefly above 1.3450 from closer to 1.3300 earlier in the night. The headline reading of the German ZEW economic confidence survey jumped to the highest level in 8 months (25.4 vs. 16.6 expected). And Russia joined the list of countries reiterating support for the Eurozone. Russia’s finance minister said Russia will buy bonds from the European rescue fund.
The European finance minister’s meeting proved to be something of a damp squib. Officials agreed to postpone the finalisation of additional support measures until an EU summit in late March.
The CAD took out the title of weakest performing currency overnight. Despite the broadly weaker USD, a dovish sounding Bank of Canada statement saw USD/CAD climb from 0.9840 to above 0.9920. The BoC held its policy rate at 1% as expected, and nudged up slightly its 2011 and 2012 growth forecasts. However, its comment “any further reduction in monetary policy stimulus would need to be carefully considered” saw near-term rate hike expectations pared back somewhat.
Against a backdrop of upbeat global growth sentiment, equity markets and commodity prices continued their rally overnight. European equity indices rose 0.9-1.2%, in many cases to fresh 28-month highs. US stocks rose a more muted 0-0.5%, weighed down by a lacklustre earnings announcement from Citigroup and the marginally weaker-than-expected January Empire manufacturing survey (11.92 vs. 12.50 expected). The CRB index (a broad index of commodity prices) posted a 0.4% gain.
Mike Jones is part of the BNZ research team.