By Mike Jones and Kymberly Martin
Broad USD weakness propelled the NZD/USD above 0.8050 overnight – a fresh 3-year high. Still, on a trade-weighted basis, the currency remains well below 2010 highs and even 2011 highs, indicative of the extent to which USD weakness is contributing to NZD strength.
Familiar themes prevailed in currency markets overnight. Global risk appetite was kept on a solid footing by encouraging US data and corporate earnings, boosting demand for “growth-sensitive” currencies at the expense of the “safe-haven” JPY and USD. Global stock markets posted modest gains and our risk appetite index (long run average of 50%) ticked up to 73%. Against the broadly weaker USD, the EUR and AUD both surged to fresh highs, helping drag the NZD/USD up from below 0.8000 to nearly 0.8060.
Looking ahead, we suspect positive momentum and solid risk appetite will ensure NZD/USD dips are limited to around 0.7880 this week. Moreover, if global commodity prices continue their recent ascent, there is every chance we see a test of the post-float high of 0.8213 in coming sessions. Certainly, if the US Federal Reserve sticks to the script tomorrow morning (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 that have been underpinning financial markets of late.
For today, we are bracing for a busy afternoon with Australian CPI figures due at 1:30pm (NZT) followed by the NBNZ business confidence survey at 3pm. Short-term support on the NZD/USD is expected on dips towards 0.7970 with resistance at 0.8130.
Broad-based USD weakness was once again the dominant theme in currency markets overnight. The USD index slipped to within a whisker of 2½ year lows around 73.75. Encouraging economic data and upbeat corporate earnings reports ensured investors retained a healthy risk appetite. The April reading on US consumer confidence snuck in above expectations (65.4 vs. 64.5) and earnings from Ford, UPS, and 3M generally exceeded expectations. The S&P500 is currently up around 0.9% following a positive lead from European bourses, and the VIX index (a proxy for risk aversion) fell from 16% to around 15.4%.
Not only did strong global risk appetite weigh on “safe-haven” currencies like the USD, but expectations the FOMC will toe a relatively dovish line at tomorrow morning’s meeting also provided headwinds for the USD. US bond yields slipped 2-5bps overnight. With the USD again on the retreat, EUR/USD jumped to a fresh 16-month high above 1.4640. Market chatter about ongoing USD reserves diversification by Asian central banks also bolstered EUR sentiment overnight. Earlier, the single-currency spent most of the Asian time zone under 1.4550 after ECB President Trichet said a strong USD was in the interest of the US.
With the EUR blazing a trail higher, most of the other major currencies soon followed suit. The AUD/USD climbed to a fresh 29-year high above 1.0790 and USD/CAD slid from 0.9550 to almost 0.9500. The GBP was the only currency not to benefit from broad USD weakness, following more uninspiring UK economic data. The April CBI factory orders index plummeted from +5 to -11, well below the +2 expected.
Looking ahead, currency markets are now firmly focused on tomorrow morning’s FOMC meeting. 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 chairman Bernanke indicate the Fed is in no hurry to start reversing policy accommodation (as we suspect), we’d expect further USD selling interest from momentum and model accounts. Near-term support on the USD index is eyed towards 73.50.
Fixed Interest Markets
There was very little action in NZ interest rate markets with an Australian public holiday yesterday, and local markets in “wait and see” mode ahead of tomorrow’s RBNZ meeting. 10 year swap rates remain around 5.4% and 2 year rates which hover around 3.34% are at levels seen immediately post the Christchurch earthquake.
The RBNZ meeting should provide little drama relative to last month’s 50bp “emergency” rate cut, but the accompanying commentary will be important. A more balanced assessment of growth and inflation risks could curtail the recent rally in interest rate markets (fall in yields).
US 10 year bond yields have crept a little lower to around 3.32%, still largely marking time ahead of the FOMC rate decision tomorrow morning. US 2 year bond yields continue to decline, having given up their early April rise they are now back at 0.61%, not far from mid-March lows. Bond yields of embattled European sovereigns continue to push higher with Greek 5 year bonds now yielding 16.7% and Portugal and Ireland’s above 11%.
Look out for today’s NBNZ business confidence survey. We expect the “own activity” indicator to hold up better than the broad confidence measure, as occurred in the previous survey.
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Mike Jones and Kymberly Martin are part of the BNZ research team.