Strong run from commodity linked currencies as Eurozone debt woes rumble on

By Kymberly Martin

The NZD outperformed all its peers relative to the USD over the past 24 hours, in the backdrop of broad USD weakness. The NZD was supported by several factors; a rise in risk appetite, strengthening global commodity prices, and a GDP figure for Q4 that dispelled concerns regarding NZ re-entering recession.

Despite lingering worries in Japan, the Middle East and European debt, (that have the potential to reassert themselves, at any point) an absence of critical new developments has led to a rise in our risk appetite index (that has a range from 0-100%) to 66.7%. Global commodity prices have also continued to surge with the CRB index close to recent highs. In addition, the NZD was underpinned by yesterday’s Q4 GDP release.

Although the 0.2%q/q outcome passed without drama, it dismissed recent speculation that NZ was re-entering recession. The data corroborated our view the NZ economy was showing low level momentum prior to the Christchurch earthquake, and that much of that momentum remains, along with the associated inflationary pressures. We continue to expect the RBNZ will remove its “emergency” rate cut by year end on our forecasts. The NZD strengthened from around 0.7440 to above 0.7500 overnight.

The NZD was relatively range bound compared to its “commodity-linked” peer, the AUD, trading around 0.7350. The NZD was also relatively range bound versus the EUR, but made significant gains versus the beleaguered GBP. The pressure on the GBP continued as retail sales data disappointed expectations, providing another reason for markets to question expectations of imminent BoE hikes.

The NZD/GBP rose from around 0.4580 to close to 0.4660. The NZD also made steady gains relative to the JPY overnight rising from around 60.20 to 60.60, as recent, globally coordinated intervention, appears to have stymied the JPY’s ascent. There are no NZ data releases today, but expect the NZD to hold onto its recent gains, in the absence of a spike in risk aversion.

Majors

The USD was weaker overnight with the “commodity linked” currencies performing strongly, especially the NZD. The GBP was the weakest performer. Risk appetite has improved further with the VIX index (a proxy for risk aversion) falling to 18%, and equities having a solid day.

The Euro Stoxx 50 closed up 1.5% while the S&P is currently up around 0.9%. As a sign that “safe haven” demand has diminished, US 10 year bond yields rose further to around 3.39%, now well off their “Japan crisis” lows of 3.17%. Oil is off a bit, although with WTI price still around US$105/barrel it remains above the psychological US$100 mark.

Commodities are generally stronger with the CRB (a global commodity index) rising above 358, just a touch off the highs above 360 reached earlier this month.

Within the “commodity linked” currencies the NZD was the star performer. However the AUD was also strong, rising from around 1.0120 to 1.0200, close to recent peaks, the highest levels since 1982. In the latest development in the Portuguese saga, Fitch has downgraded the sovereign to A- in light of the Prime Minister’s recent resignation, and increased risk to fiscal financing given the parliament’s failure to pass fiscal consolidation measures.

It has put the country also on ‘rating watch negative’. In European data, the Eurozone PMI came in only slightly below expectation, but showed strength in services relative to manufacturing compared to expectations.

In the backdrop of a weak USD however, the EUR traded up from around 1.4080 to above 1.4180. US initial jobless claims and continuing claims provided little surprise, but elsewhere data disappointed. Durable goods orders-ex-transportation for February declined 0.6%m/m (2.0% rise expected), while capital goods orders declined 1.3%m/m (4.3% rise expected).

The USD index was heavy, declining from around 76.00 to 75.60. The GBP/USD was the weakest performer over the past 24 hours declining around 0.8%.

The GBP struggled as the previous day’s downgrade to UK GDP forecasts was followed by weak retail sales data. Retail sales-ex-auto fuel declined 1%m/m in February (-0.6% expected) to show a modest 1.2%y/y rise (2.5% expected). The GBP traded from around 1.6250 down to 1.6100. The JPY has remained within a trading range again, overnight trading between 80.80 and 81.00 Look out for further developments in Portuguese affairs.

Today’s IFO data will provide a good indicator of the strength of ‘core’ Europe. There is much Fed speak this evening, along with the U. of Michigan Confidence data.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.