By Mike Jones
The NZD has been the strongest performing currency over the past 24 hours.
From around 0.7350, the NZD/USD climbed to almost 0.7450 overnight. As uncertainty and fear over Japan’s nuclear crisis has receded, investors’ appetite for risk has recovered, renewing support for “growth-sensitive” currencies like the NZD.
Our risk appetite index (which has a scale of 0-100%), at 61.8%, has now recovered all of the near 20% point fall inspired by the Japanese disaster (the Nikkei stock index has recovered about ¾ of its 21% plunge). It’s no coincidence that the NZD/USD has rebounded back to its pre-Japanese tsunami levels around 0.7400-0.7450.
Overnight, modest gains in global commodity prices saw “commodity-linked” currencies like the NZD and AUD outperform. As momentum and model accounts were forced to further unwind NZD/USD short positions, the currency was propelled to almost 0.7450, before drifting off to around 0.7400. A bout of NZD/EUR buying also underpinned the NZD last night.
Jitters about Irish sovereign solvency weighed on EUR sentiment, dragging the EUR/USD from 1.4250 to closer to 1.4200. This, combined with solid NZD/EUR demand from commercial and custodial accounts, saw NZD/EUR climb from 0.5170 to around 0.5220. This morning’s current account figures are expected to show the annual deficit slimming even further for the year to December, to about 2.3/2.4% of GDP.
It might be even less, if the initially-estimated $1.7b reinsurance credit from the 4 September earthquake is revised upward.
Looking into the March quarter, a bigger credit from February’s earthquake may well see the current account move into surplus for the first time since 1973. We’ve argued NZ’s vastly improved underlying external position portends a higher NZD in future (see NZD: Long-Run Equilibrium Shifting Up?). However, in the short-term, the NZD/USD will continue to take its cues from gyrations in global risk appetite. For today, initial resistance is expected on bounces towards 0.7450, with support around 0.7370.
Majors
The G10 currencies produced a mixed performance overnight. With the major currencies pulled in different directions, the USD mostly tracked sideways. The first part of the night was all about a surge in GBP. Rumours February UK inflation could print strong saw the GBP/USD start the night on the front foot. In the event, CPI did exceed expectations (4.4%y/y vs. 4.2% expected), leading markets to again toy with the idea of an April Bank of England rate hike (a 15% chance of such is now priced).
The increased interest rate support saw GBP/USD climb from around 1.6300 to 14-month highs above 1.6380. For these gains to be sustained, we’ll have to see tonight’s February BoE minutes reveal a more hawkish bias. This looks unlikely to us and so we doubt GBP/USD rallies above 1.6400 will be sustained near-term. In contrast to the surging GBP, the EUR has traded heavily over the past 24 hours. Rumours Ireland had missed a coupon payment on its sovereign bonds weighed on the single-currency, as did market chatter about large option barriers around 1.4250.
After drifting up to a smidge below 1.4250, EUR/USD quickly tumbled back through 1.4200. Hawkish chat from the ECB’s Stark (Japan’s disaster has not changed the near-term policy outlook) helped limit the EUR’s decline. “Commodity-linked” currencies like AUD and NZD were the strongest performers of the night, thanks to broad based gains in global commodity prices. Indeed, AUD/USD rose around ½ cent to above 1.010.
Oil prices climbed over 1% as unrest in Yemen threatened to further crimp energy exports, while the broad CRB index recorded a 0.6% gain. In contrast to its “commodity-linked” peers, the CAD gave up some of yesterday’s gains thanks to a shock decline in January Canadian retail sales (-0.3% vs. +1.0% expected, the second straight monthly decline). In the wake of the weaker figures, USD/CAD jumped from 0.9750 to almost 0.9800. USD/JPY spent the night trading in a narrow 80.90-81.15 range as Japanese officials maintained the threat of further co-ordinated intervention.
Japanese finance minister Noda said "we will cooperate as appropriate while closely watching market movements". Looking ahead, the USD looks set to struggle as long as the current environment of fading risk aversion and lacklustre US economic data is maintained. The downside break of November’s 75.65 low on the USD index was certainly a bearish signal. Near-term support will be found at 75.25 with initial resistance at 78.75.
Mike Jones is part of the BNZ research team.
All its research is available here.
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