* Previous article had Wednesday's wrap in. Updated with Friday's wrap
By Mike Jones
The NZD/USD dribbled lower overnight, reflecting a broad-based strengthening in the USD.
Contributing to the stronger USD, US jobless claims fell to a 2½ year low, boosting confidence in a sustained US labor market recovery. A bout of heavy EUR selling also underpinned the USD. News the ECB was forced to buy Portuguese bonds in an effort to lower borrowing costs saw the EUR/USD tumble from 1.3740 to just above 1.3600.
Against the broadly stronger USD, AUD/USD slipped from 1.0060 to nearly 1.0020 and the NZD/USD dipped from above 0.7700 to a 2½ week low around 0.7660. The AUD was already treading softer after yesterday’s employment figures. Australian employment rose a solid 24k in January (17.5k expected), but an 8k fall in full-time employment took the gloss off the report.
Looking ahead, we wouldn’t be surprised to see weak domestic fundamentals take more of a toll on the NZD/USD in coming weeks. While we still argue local markets are under-pricing the extent of RBNZ tightening likely over the next 12 months, we don’t see any obvious trigger in coming weeks to prompt a reassessment of the market’s bearish view. Next week’s retail figures look odds on to print negative (in terms of both monthly and quarterly volume movements), and upcoming REINZ housing figures should reveal NZ housing market activity is still in a sleeper hold.
A quick “fair-value” analysis certainly suggests downside risks to the NZD/USD in the near-term. Our short-term valuation model currently suggests a NZD/USD “fair-value” range of 0.7400-0.7600. To us, this suggests resistance in the 0.7800/50 window should continue to cap NZD/USD rallies in the short-term.
For today, expect initial support for the NZD/USD to emerge on a further pullback to 0.7620. Rallies should be limited to 0.7710 on the day. Keep an eye out for today’s NZ January food price index. We expect it increased 0.6%m/m, following dips over the previous couple of months.
In a reversal of yesterday’s fortunes the USD showed broad strength against the major currencies overnight. The GBP was the only currency to withstand USD strength.
The USD was on an uptrend overnight as there was little to drive global risk appetite higher, and the EUR came under pressure, due to local events. Overnight, the ECB was forced to intervene in the eurozone bond market, to buy Portuguese debt after the country’s cost of borrowing on 10 year debt jumped to 7.63%. This level represented a euro-era high. The EUR was on a steady downtrend from around 1.3740 yesterday to around 1.3620.
The USD index ended the night around 78.10, after touching a high around 78.30. It has now recovered from its early Feb fall, although still remains somewhat below levels where it started the year. US jobless claims overnight surprised positively (383k vs. 410k expected) providing additional USD support.
The VIX (a proxy for risk appetite) remained around 16%. US bond yields declined to be back at 3.68%.The S&P500 remained largely flat, following on from a subdued -0.20% performance from the Euro Stoxx 50. The European equity markets also struggled in the backdrop of some weakness in European earning announcements, notably in the banking sector.
The GBP ended the night slightly higher versus the USD, recovering from a fall early this morning after the Bank of England policy announcement. The BoE left rates at 0.5% despite the recent broadening of dissent within the Bank regarding current low rates, and their potential to stoke UK inflation. They also announced that their asset purchase target remains at £200b for February. The GBP fell from 1.6100 to 1.6020 before climbing back to 1.6120.
The NZD and AUD also showed weakness overnight. The AUD declined as global risk appetite waned, interrupted by a short-lived spike following the release of Australian labour data. On the surface, the data exceeded expectations. (24k vs. 17.5k expected) However, it proved insufficient to offset stronger global trends.
This evening the University of Michigan confidence numbers for February are released that will show how US consumer confidence is developing. ECB President Trichet will also speak today in Germany, potentially shedding some light on the future path of ECB rate hikes.
Mike Jones is part of the BNZ research team.