By Mike Jones
The NZD/USD soared to 3-year highs above 0.8000 last week, reflecting the positive impetus from buoyant risk appetite and soaring global commodity prices. While the rest of us were hunkered up against the cold, the NZD/USD spent the Easter break mostly consolidating around the 0.8000 level.
US markets were open overnight, although currency movements were far from exciting. A modest bounce in the US dollar (after plunging to 2 ½ year lows last week) knocked most of the major currencies off their highs.
The NZD/USD eased from above 0.8030 to around 0.8000. Domestic developments are exerting relatively little influence on the NZD at the moment. For evidence of such, one only need to glance at NZ-US interest rate differentials which, at around 255bps, are consistent with a NZD/USD closer to 0.6500. We don’t think this is about to change, although Thursday’s RBNZ policy announcement may provide some more domestic direction for the currency.
Given the dramas of the March MPS, we believe the RBNZ will want to deliver a “nothing to see here” message this week, including a signalled steady cash rate of 2.50% for the near future. Wednesday’s NBNZ business survey will also be worth a look for a timely update on post-earthquake economic progress.
All up, we suspect NZD/USD dips will be limited to around 0.7880 this week. Moreover, if global commodity prices continue their recent ascent (gold and silver prices hit fresh all time highs overnight), there is every chance the currency tests the post float high of 0.8213 in coming sessions.
Certainly, if the US Federal Reserve sticks to the script on Thursday (rates on hold, quantitative easing to finish in June, and no chance of near-term policy tightening) there will be little to disrupt the broad themes of bubbly risk appetite and USD weakness underpinning financial markets of late. It’s worth noting, our momentum model is still long NZD/USD (entered at 0.7550), and is short the USD against every major currency pair except USD/JPY.
There hasn’t been a whole lot of action in currency markets over the Easter break.
The major currencies have mostly traded in tight ranges around the levels seen on Thursday last week. Overnight, US markets were open. However, thin trading conditions and a sparse data offering ensured currency movements were fairly subdued. The USD index ended the night slightly firmer around 74.00, about 0.4% above the 2½ year low hit on Thursday last week.
Dampening investors’ risk appetite slightly, a round of weaker-than-expected US earnings results weighed on Wall St stocks. The S&P500 is currently down around 0.2%. This encouraged “safe-haven” demand for the USD, despite a couple of soft US economic reports. March new home sales bounced a less than expected 11.1% and the Dallas Fed manufacturing index also under-whelmed (10.5 vs. 13.7 expected).
The marginally stronger USD has knocked some of the major currencies off their recent highs. The EUR/USD is trading around ½ cent below the 16-month high around 1.4650 reached last week, while the AUD/USD has eased ½ cent from the 29-year high above 1.0750 struck early this morning.
Looking ahead, this week brings plenty of event risk to help shape currency market sentiment. Undoubtedly, traders’ focus is Thursday morning’s FOMC meeting. This is the first meeting for which Chairman Bernanke will provide a press conference afterwards. We expect the Committee will leave its policy rate on hold and confirm the US$600 billion asset purchase program will end as scheduled in June.
Should Bernanke indicate the Fed is in no hurry to start reversing policy accommodation (as we expect), further USD weakness may be in prospect this week. Keep an eye out as well for Q1 GDP estimates from the US on Thursday (1.9% annualised expected) and UK on Wednesday (0.5% expected).
Fixed Interest Markets
Last week’s DMO auction was well bid with close to $3bn bids for $1bn on offer. After rising in anticipation of the large auction, bond yields fell given good demand, with 05/21s entering the Easter break yielding around 5.65% and 04/13s around 3.42%. Swap markets also rallied last week with 2-year yields back at 3.36% by week end. 10-year swap yields however only fell around 2bp, to around 5.47%, resulting in a meaningful narrowing of the negative spread (EFP) with similar dated bonds.
EFP was as wide as -36bp just two weeks ago and has now narrowed to -17bp, and may be getting to levels where we see some profit taking. The swap curve has also steepened meaningfully with the 2-10 year spread now around 211bp. US 10 year Treasury yields declined a little from around 3.4% to 3.36% by the end of last week.
The quintessential “safe haven” asset seems to be marking time, in a familiar range, apparently suffering no long-term effect from the downgrade last week by rating agency S&P of the US sovereign outlook to “negative watch”.
Mike Jones is part of the BNZ research team.