By Mike Jones
The NZD/USD has spent the past 24 hours trading choppily in the familiar 0.7620-0.7670 range.
Financial market sentiment took a dive overnight, as shockingly weak Q4 UK GDP figures (-0.5%q/q vs. +0.5% expected) reignited global growth concerns. Global equities fell 0.1-0.8%, the CRB index (a broad measure of commodity prices) slipped 1.2% and our risk appetite index (which has a scale of 0-100%) dipped from 72.8% to 71%.
Not surprisingly, a heavy toll was taken on the GBP, propelling NZD/GBP from below 0.4800 to nearly 0.4850. Rising risk aversion and renewed global growth concerns reduced the appeal of “growth-sensitive” currencies like the NZD and AUD, as investors sought out the relative “safe-haven” of currencies like the USD, CHF and JPY. Still, the losses in NZD/USD were limited to around 0.7620, in part reflecting a spurt higher in NZD/AUD.
Expectations for future RBA rate hikes have been dampened over the past 24 hours not only by yesterday’s benign Q4 Australian CPI figures (0.4%q/q vs. 0.7% expected), but also by some relatively dovish comments from noted RBA ‘watcher’ Terry McCrann overnight. McCrann said “it is entirely possible that the next [RBA rate] move could be a cut”. From around -130bps at the start of the week, NZ-AU 3-year swap spreads rose to around -123bps overnight, underpinning the NZD/AUD’s climb from 0.7650 to almost 0.7720.
Looking ahead, we wouldn’t be surprised to see a modest pull-back in NZD/AUD in coming sessions. Our short-term valuation model currently estimates a NZD/AUD “fair-value” range of 0.7450-0.7650. This supports our near-term view that rallies above 0.7750 will likely run out of steam, in the absence of further gains in NZ-AU interest rate differentials.
For today, the Australia Day holiday means we are probably in for a sleepy local session. Keep an eye on NZ credit card billings due at 3pm (NZT). Short-term support on NZD/USD is eyed towards 0.7540, with stiff headwinds expected on rallies towards 0.7750.
GBP showed the most significant moves overnight, in direct response to a very weak Q4 UK GDP number. UK GDP shrank 0.5%q/q in Q4 versus an expectation of 0.5% growth (1.7%y/y versus an expectation of 2.6%y/y). GBP/USD fell overnight from highs of above 1.6000 to lows around 1.5750, soon after the data.
The economic data suggests underlying weakness in the UK economy. This raises risks to our view that the Bank of England will raise rates in May, with the potential that any hikes will be pushed out to H2 2011. GBP weakness was broad based versus the crosses.
Elsewhere, the USD index showed some softness overnight, reaching lows of around 77.810 before returning to levels around 78.100. USD sentiment was likely bolstered later in the evening by US consumer confidence numbers for January that came in at 60.6 versus an expectation of 54.0.
The previous reading was 52.5. Generally across markets, however, sentiment was somewhat lacklustre, after the UK growth numbers reminded investors that the expected global growth recovery is not without risks. Equities were down across the board in the US and Europe. The FTSE was down close to 0.5% after the poor data, and the Euro Stoxx 50 closed down 0.7%.
The S&P is currently in the red, and US 10yr bonds yields fell from a high of close to 3.42% to levels closer to 3.3%. Commodities were also generally lower, with oil showing a sharp fall late last night. After the weak U.K data, oil prices fell sharply from a high of above 87.8 to a lower range around 86.50. Offsetting this generally subdued sentiment was one positive piece of news out of the Eurozone. The Eurozone bail-out fund saw very strong demand for its first ever bond issue.
Over €40b in orders were received for the bonds. This enabled the fund to easily allocate the maximum €5b of bonds at a yield of 2.8%. The EUR managed to hold its own overnight. While some EUR/USD weakness was seen after the UK data, with it dropping to below 1.3580, it later climbed back to levels around 1.3640, where it started the evening.
Looking ahead, tomorrow morning the FOMC will provide its rate decision. It is widely expected to maintain rates at current levels of 0%-0.25%, and keep it quantitative easing programme unchanged.
Mike Jones is part of the BNZ research team.