Currency market eyes on China, local CPI, US corporate earnings and Europe

Currency market eyes on China, local CPI, US corporate earnings and Europe

By Mike Jones

At around 0.7720, the NZD/USD appears little changed from this time yesterday. However, this masks what was a fairly wild ride in the currency overnight.

Through the first part of the night, the NZD/USD surged to nearly 0.7790. Leaks ahead of the official Chinese data today suggested the Chinese economy grew 10.3% in Q4, above the 10.2% expected. Chinese inflation was also rumoured to have cooled to 4.6%, from 5.1% in November.

Indications solid Chinese demand was being maintained without rampant inflation saw commodity prices and global equities start the night strongly, underpinning “growth-sensitive” currencies like the NZD and AUD. However, later in the night, the NZD/USD suffered a sharp fall from grace. Global stock markets reversed course, indicative of a cooling in risk appetite, following a terrible Goldman Sachs profit announcement and a weak set of US housing market numbers.

Our risk appetite index finished the night at 75%, from above 77% at the start of the night. A bout of NZD/EUR selling also weighed on the NZD/USD. The recent spate of good European news continued overnight, this time as 2011 German economic growth forecasts were revised up, from 1.8% to 2.3%. EUR/USD jumped to 2-month highs above 1.3500, knocking NZD/EUR below 0.5750.

Following Monday’s weaker than expected NZ Food Price Index, we’ve settled on a 2.5%q/q forecast for today’s Q4 CPI. The RBNZ, for the record, had 2.3% built into its December MPS. Given the many uncertainties around this CPI number – including the impact of the October GST hike – we could conceivably get a number anywhere between 2% and 3% for the quarter.

We suspect anything north of 2.6% would see interest rate markets move to price an earlier (June) RBNZ tightening, providing fresh legs for the NZD/USD. Initial resistance is sighted at 0.7800, with support towards 0.7690. Along with the CPI, keep an eye on today’s slew of Chinese data due at 3pm (NZT).

Majors

The USD weakened against most of the major currencies overnight. As with the previous day, gains in the EUR were the key driver of the weaker USD. Germany increased its 2011 growth forecast to 2.3% from 1.8%, helping bolster confidence in the European growth outlook. EUR sentiment also received a leg-up from rumours Bundesbank President Weber (regarded as a hawk) would likely replace Trichet as the next ECB President.

From below 1.3400, EUR/USD climbed above 1.3500, amid reports of strong demand from Asian and Middle East sovereign accounts. EUR crosses were also in hot demand overnight. Last night’s UK unemployment figures suggested the UK labour market remains in a fragile state (the unemployment rate held steady at 7.9%, as expected), prompting some paring of Bank of England rate hike expectations.

Accordingly, EUR/GBP headed up to around 0.8450 from below 0.8400 earlier in the night. Undoubtedly, a bout of short-covering by speculative investors has helped propel the EUR higher in recent days, but ‘fundamental’ factors have also played a part.

Indeed, EU-US 2-year bond spreads rose to 103bps overnight, the highest since November. On their own, interest rate spreads around these levels are indicative of further upward pressure on the EUR/USD. It was a generally poor night for investors’ risk appetite.

However, this didn’t feed through to increased “safe-haven” demand for the USD, thanks to the strengthening EUR. Global equity markets were perky early in the night, but gave up their gains as the session progressed. European equity indices closed down 0.9-1.3%, while the S&P500 is currently down around 0.9%. The VIX index (a proxy for risk aversion) jumped from 16% to a smidge below 17% (long run average = 20%).

A weak earnings announcement from Goldman Sachs sapped optimism about the US corporate outlook (GS recorded a 53% decline in Q4 profit), and US housing market data wasn’t particularly inspiring either. Housing starts fell to the lowest in over a year in December (-4.3%m/m vs. -0.9% expected), albeit with some better-than-expected building permits numbers offsetting the impact of somewhat (16.7%m/m vs. 1.8% expected).

Looking ahead, expect plenty of attention on today’s December Chinese data ‘dump’. A set of numbers consistent with only a mild slowing in Chinese demand (as markets expect), would provide support to “growth-sensitive” currencies like the AUD, CAD and NZD.

Mike Jones is part of the BNZ research team. 

All its research is available here.

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