By Mike Jones
The NZD/USD was one of the weakest performing currencies last week. After hitting a mid-week high of nearly 0.7820, the combination of a sharp paring of RBNZ tightening expectations and a stronger USD saw the NZD/USD slide back to around 0.7700. The NZD was buffeted by offsetting influences last week.
The global backdrop bestowed significant support on the NZD. Global risk appetite and commodity prices were buoyed by investors’ more optimistic outlook for the global economy.
Our risk appetite index (which has a scale of 0-100%) soared to 75.5% (from 62.9% last Friday), the ANZ NZ commodity price index rose 3.8%m/m to another record high, and milk prices jumped a further 7.2% at Fonterra’s fortnightly auction.
Still, the domestic picture remained a clear drag on the currency. Last week’s surprise jump in the NZ unemployment rate (to 6.8%, from 6.4%) carried on the theme of negative NZ economic news. In response, markets pushed back the expected timing of the next RBNZ hike to October, dragging NZ interest rates lower across the curve. In clear contrast, US markets brought forward the timing of the first Federal Reserve tightening (to year end) on Friday following a sharp drop in US unemployment (to 9.0% from 9.5%).
US bond yields finished the week 15-25bps higher. It’s worth noting, the recent contrast in NZ-US economic fortunes has seen the NZD/USD’s yield differential narrow noticeably. From above 290bps at the start of last week, NZ-US 3-year swap spreads slid to about 265bps on Friday – the lowest since August 2009. As a result, we suspect NZD/USD gains will be limited to around 0.7800/0.7850 this week. Initial support is eyed towards on dips towards 0.7560. A quick “fair-value” analysis certainly suggests downside risks to the NZD/USD in the near-term.
Our short-term valuation model (which is based on NZ commodity prices, NZ-US interest rate differentials, and global risk appetite) currently suggests a 0.7350-0.7550 NZD/USD “fair-value” range. After the shenanigans in last week’s data deluge, this week’s local data calendar looks fairly quiet. Improved consumer confidence and car registrations in January are a good backdrop for a bounce in Wednesday’s electronic card transactions. However, the QVNZ housing statistics for the month are bound to be still in a holding pattern.
The other indicator to note is Friday’s Food Price Index, for January, which we expect increased 0.6%, following falls over the previous two months.
The USD led the action on Friday, moving higher versus most of the major currencies after the release of US labour market data. Interestingly, the non-farm payroll data actually disappointed at 36k vs. the consensus expectation of 146k.
However, the market appeared to focus on data showing the US unemployment rate fell to 9.0% in January from 9.5% in December. It appeared to also take comfort that payroll additions in the manufacturing sector were higher than expected. The USD index rose above 78.00 from around 77.80 in the wake of the report, to finish the week at levels close to where it started. US bond yields moved steadily higher over the course of last week, with an additional boost from Friday’s data.
10 yr bond yields moved up from 3.3% to around 3.64% over the week, their highest level since May 2010. Improving growth sentiment was also reflected in higher equity markets. The S&P500 rose 2.7% over the week. While uncertainty regarding the political situation in Egypt remains high, markets now seem less concerned about the potential for contagion in the region or impacts on global growth. Oil prices fell over the week from highs close to US$92 to around US$89.
Over the weekend, it appears that talks between opposition groups in Egypt with the Vice President could sow the seeds of political reform that protestors demand. The fate of President Murabak remains a contentious issue. The banks reopened in Egypt on Sunday. While tensions appear to be easing, developments will continue to influence market risk appetite. The EUR suffered on the back of US strength on Friday, falling to 1.3540 from 1.3640, before recovering to 1.3580.
The EUR ended down on the week, after suffering earlier from comments by ECB President Trichet that were less hawkish than the market expected. The GBP/USD was also weaker on Friday, but ended the week in positive territory. Earlier in the week, the GBP had been supported by a run of good economic data and some hawkish comments by MPC members. The strongest performing currency last week was the AUD, withstanding fears about the impact of floods and cyclone.
In Friday’s RBA Statement of Monetary Policy there was no medium term downgrade in growth or inflation as a result of the recent floods. The AUD ended the week around 1.010 falling from Friday night highs around 1.020, after US data was released. In the week ahead, keep an eye on Bernanke’s testimony on Wednesday and the BoE meeting on Thursday.
Mike Jones is part of the BNZ research team.