By Mike Jones and Kymberly Martin
At around 0.8050 the NZD/USD is seemingly little changed from this time yesterday. However, this masks what has been a rollercoaster ride in the NZD over the past 24 hours. Yesterday’s March NBNZ business survey revealed a whopping bounce-back in business confidence from the earthquake-driven hit it took in March. Nationwide net confidence roared back into positive territory, at +14.2, from -8.7 in February. So not quite fully restored to the honking levels just prior to the earthquake, but strong enough to infer GDP growth in the range of 3-4% this year.
We doubt the numbers were strong enough to have the RBNZ thinking about near-term rate hikes, but they did get the market excited about a hike before Christmas (as is our core view), helping send the NZD/USD to a fresh 3-year high a smidge above 0.8100. However, the highs in the NZD/USD didn’t last for long. Later in the afternoon, a surprise jump in Australian inflation (3.3% annual vs. 3.0% expected) spurred renewed selling interest in NZD/AUD from speculative and leveraged type players. From almost 0.7500, the NZD/AUD skidded back to around 0.7430, helping drag the NZD/USD back towards 0.8050.
Looking ahead, attention now turns to the RBNZ’s policy announcement at 9am. We’re looking for a “nothing to see here” message from the RBNZ, and a steady cash rate of 2.50%. However, watch for any greater acknowledgement of the generational terms of trade boom NZ is experiencing, or even a hint of concern about inflation. Such sentiments would only provide additional legs to the currency.
Many are wondering if the high NZD will be starting to cause the RBNZ some angst. However, our view is that the central bank is probably relatively comfortable with where the currency is. For one thing, the TWI, which is what matters for monetary policy considerations, is not all that far away from the RBNZ’s March MPS assumption (of a 68.00 average for Q2). What’s more, recent rhetoric suggests the Bank views record high NZ commodity export prices as entirely justifying the current level of the currency.
There were few fireworks from this morning’s FOMC statement and press conference from chairman Bernanke. Despite a modest upgrade in its assessment of the US economy, the Fed continues to believe extremely accommodative policy is required for an “extended period”. The Fed is clearly not thinking about tightening policy anytime soon and, from this perspective, there was certainly nothing in the Fed’s language to arrest the USD’s recent decline. Indeed, the USD index slumped to a fresh 2½ year low this morning.
As widely expected, the FOMC left its policy rate at 0-0.25% and said it would end its US$600b quantitative easing programme in June, as scheduled. Moreover, the Fed will keep the size of its balance sheet unchanged by reinvesting maturing mortgage-backed securities in US Treasury bonds.
Still, if anything, the tone of the statement was a touch more dovish than some had expected. Underlying inflation pressures were reported as “subdued” and pressures from commodity price gains were labeled as “transitory”. Bernanke’s subsequent address simply reinforced these cautious sentiments. US equity markets rallied in response (the S&P500 is currently up around 0.4%) while US Treasury yields eased and the USD reversed its earlier modest gains.
From around 1.4660 prior to the Fed statement, EUR/USD climbed to a 16-month high above 1.4720 and AUD/USD re-tested 29-year highs around 1.0850. The AUD already had a head of steam up following yesterday afternoon’s worryingly strong Q1 inflation figures (1.6%q/q vs. 1.2% expected). RBA cash rate expectations edged up slightly to 25bps of tightening over the next 12 months.
Along with the broadly weaker USD, an on-expectation read on Q1 UK GDP figures (0.5%q/q) provided a boost to the GBP, quashing earlier rumours of a terrible number. From 1.6440 before the release, GBP/USD soared to nearly 1.6560.
The JPY was the weakest performing currency of the night. For the most part, this reflected ratings agency S&P’s downgrade of Japan’s sovereign ratings outlook to negative (from stable) yesterday. The JPY lost ground relative to all of the major currencies, and USD/JPY leapt from 81.50 to almost 82.70.
Fixed Interest Markets
NZ markets have made limited moves ahead of today’s RBNZ meeting, though meaningful rises in Australian yields followed yesterday’s high-side CPI number. US yields have shown a muted reaction to the Fed announcement. NZ bond and swap curves made small moves in opposite directions yesterday, with the bond curve inching lower by 2-3bp, while the swap curve crept higher by 2-5bp. The spread (EFP) between 10 year swaps and bonds has therefore narrowed to -16bp. 2 year swaps ended the day yielding around 3.4% and 10 years around 5.48%.
More significant moves were seen across the Tasman after Australian CPI came in above expectation. Australian 2 year swap yields rose almost 10bp and 10 year swaps yields by around 7bp to 5.29% and 6.08% respectively. This resulted in a drop in the NZ-AU 2 year swap spread to close to -190bp.
We expect today’s RBNZ commentary to be a little more balanced between growth and inflation risks, than at the previous meeting, with the potential for a modest rise in yields.
Mike Jones and Kymberly Martin are part of the BNZ research team.