Kiwi dollar rises against the yen after Standard & Poor's downgrades Japan's sovereign credit rating

By Mike Jones

There was a risk the RBNZ would soften its tone a touch in yesterday’s OCR review. In the event, it held pretty firm to its December MPS line. And good on it. The Bank duly acknowledged the recently mixed-to-weak data.

However, more of the emphasis was on the firming in things with a forward-looking hue to it, such as business confidence, capital investment and NZ commodity prices. All told, the Bank’s comments were firm enough to leave us picking June for the next OCR hike, with a 4.25% target for end-year and a 5.00% peak by mid 2012. Market pricing edged marginally closer to our view in the wake of the Statement, providing some juice for the NZD.

OIS markets moved to price a roughly 50/50 chance of a June 25bps hike, causing swap rates to nudge higher, and the NZD/USD to gap from 0.7660 to around 0.7720. Buying interest from short-term speculative and leveraged accounts keen to square short positions in NZD/AUD and NZD/USD added to the currency’s momentum. Post RBNZ, the NZD/USD held its own, albeit with a couple of factors providing some volatility. The AUD/USD skidded from 1.0000 to around 0.9950 after the Prime Minister Gillard’s introduction of a Queensland flood tax saw investors slash RBA rate hike expectations.

The NZD/USD was briefly dragged to around 0.7700, while NZD/AUD soared above 0.7800 for the first time since November. Global markets were later blindsided by ratings agency S&P’s surprise downgrade of Japan’s sovereign rating. Fears of a full-blown global debt crisis saw risk appetite evaporate, briefly knocking NZD/USD below 0.7700.

Still, the heaviest toll was taken on the JPY and NZD/JPY was propelled to 2-month highs above 64.00 as a result. For today, we continue to see NZD/USD gains limited to heavy resistance at 0.7800. Support is seen on dips towards 0.7680. Look out for a lunchtime speech from RBNZ Governor Bollard, in which he may elaborate on the themes from yesterday’s OCR Review.

Majors

The spotlight has moved to Japan overnight.

Ratings agency S&P downgraded Japan’s sovereign debt rating from AA to AA-. The agency appears concerned that Japan’s debt ratio will continue to grow more than expected. From 82.20, USD/JPY spiked up to 83.00 after the announcement. The news revived sovereign debt concerns more broadly. However markets generally held up. European and US equity markets ended the night flat to up. The USD index traded largely sideways overnight, in a band from 77.60 to 78.10.

Yesterday’s FOMC meeting kept US rates at 0-0.25%, as expected. The commentary provided little market moving information. The statement signalled no change in the Fed’s policy of keeping interest rates “exceptionally low” for “an extended period”. It also maintained its commitment to purchase US$600bn of Treasuries by the end of Q2 2011. Elsewhere in the US, the data tone was a little soft overnight with durable goods orders for Dec falling 2.5%m/m relative to consensus expectations for 1.5% growth.

However, much of the weakness was contained in the ‘transportation sector’ with durable goods ex-transportation coming in close to expectation at 0.5%. US weekly jobless claims also ticked up a bit to 454K, (expectation 405K) a level not seen since last October. After rising early in the evening, US 10-year bond yields fell rapidly after the data, back to around 3.42%.

An offset to some of the weakness in US economic data has been a generally solid tone in corporate earnings reported for 4Q, sentiment which has helped to underpin equity markets. The AUD/USD fell quite sharply after the Japanese downgrade news, from a level around 0.9970 to close to 0.9880, before recovering to levels around 0.9920. The AUD had weathered the commentary in Prime Minister Juliard Gillard’s speech yesterday which outlined that the cost of the Government’s response to the floods would be $5.6b.

The EUR ended the night largely where it began, at around 1.3700. It did see some volatility overnight after the Japanese announcement, with an initial plunge followed by a fairly rapid recovery. This evening will see the first print of US Q4 GDP which is expected to have grown 3.5%q/q. The US University of Michigan Confidence number for January will also be released tonight.

Mike Jones is part of the BNZ research team. 

All its research is available here.