By Mike Jones
Yesterday’s CPI figures were no smoking gun for further RBNZ rate hikes. Indeed, while the 2.3% quarterly gain was precisely in line with Reserve Bank and market expectations, the results had, if anything, a hint of a softer underbelly, and were obviously not up to the 2.5%q/q headlines we anticipated.
In response, investors reduced the odds of a June RBNZ rate hike to about 50/50, with a 25 point hike not fully priced until late-July (our own view is still centred on June, for now). The associated reduction in the currency’s yield advantage (NZ-US 3-year swap spreads slipped 8bps to 287bps) dragged the NZD/USD from 0.7700 to closer to 0.7650 yesterday afternoon. Overnight, the NZD/USD suffered at the hands of a broadly stronger USD, eventually skidding below 0.7550.
Rising US bond yields provided tailwinds for the USD overnight, as a slew of upbeat US data added to recent evidence of accelerating US growth momentum. A negative night in equity and commodity markets also supported the USD via increased “safe-haven” demand. Speculation yesterday’s buoyant Chinese data will necessitate a faster pace of policy tightening has taken a clear toll on investors’ risk appetite over the past 24 hours. Indeed, our risk appetite index (which has a scale of 0-100%) plunged to 71.2% overnight, after starting the week closer to 78%.
The more downbeat global backdrop saw investors trim positions in “growth-sensitive” currencies like the NZD and AUD, in favour of “safe-haven” currencies like the CHF and USD.
Looking ahead, we’re picking a 1.2% rebound in today’s November retail sales figures, much in line with the market, with a 1.0% gain ex-auto. Still, bear in mind this mostly reflects a technical bounce from what was a dreadful 2.5% plunge in October. A negative surprise would only serve to increase the expected downward pressure on the NZD/USD today. We suspect rallies towards 0.7620 will attract sellers in the short-term.
The USD strengthened broadly overnight, underpinned by rising US bond yields and renewed “safe-haven” demand. Early in the night, a stronger EUR kept the USD on the back foot. A chorus of hawkish commentary from various ECB officials, combined with stronger than expected December German producer price data (5.3%y/y vs. 4.9% expected), saw markets price in a greater extent of 2011 ECB rate tightening (73bps worth of hikes compared to 65 the previous day), encouraging demand for EUR/USD and EUR crosses.
Further easing in European sovereign funding concerns also provided support. Rumours the European Financial Stability Fund will be given the power to buy peripheral nations’ bonds, as part of a broader crisis response, spurred a narrowing in sovereign credit spreads. From below 1.3440, the EUR/USD briefly climbed above 1.3500 and EUR/CHF soared from 1.2850 to above 1.3000. Later in the night, the USD spurted higher, pressuring all of the major currencies lower.
Worries about a faster pace of Chinese policy tightening dampened investors’ risk appetite, after yesterday’s Chinese data showed GDP growth surging ahead of expectations (9.8%y/y vs. 9.4% expected) and inflation slowing by less than expected. European and US equity indices posted losses of 0.2-1.8%, commodity prices declined, and the VIX index (a proxy for global risk aversion) jumped from around 17% to over 18.5%.
Against a backdrop of equity market weakness and rising risk aversion, investors cut positions in “growth-sensitive” currencies like the NZD and AUD in favour of the relative “safe-haven” of the USD. Modest gains in US bond yields also underpinned the USD last night after a mostly upbeat batch of US data buoyed optimism about the US recovery. US jobless claims posted their biggest decline in a year, falling from 445k to 404k in the week to January 15 (420k expected). Existing home sales and leading indicators data for December also outpaced analyst expectations.
Two-year US Treasury yields ticked up 3bps to 0.6%, while 10-year yields rose from 3.34% to 3.41%. Against the broadly stronger USD, the EUR was knocked back below 1.3450, the GBP slipped from 1.6000 to nearly 1.5850 and USD/JPY climbed from 82.20 to nearly 83.00. For today, support on the USD index should be found on dips towards 78.30, while initial headwinds are expected ahead of 79.20.
Mike Jones is part of the BNZ research team.