'Undeniable upside momentum' makes NZD a star performer

By Sam Coxhead*:

The New Zealand dollar was the star performer last week. It has gained ground against all trading partners and is threatening record highs against the USD and GBP.

It appears prudent for the Treasury to be increasing issuance to meet demand at this time.  Any future tightening of global credit markets would sharply increase the cost of funding of the increased bond program in the future and this would be of further detriment to New Zealand’s finances.

However the buyer of NZD Govt Bonds pays for them with New Zealand dollars. Therefore any large scale bond purchases tend to put upward pressure on the value of the New Zealand dollar, which is what we have saw last week.

 Major Announcements last week:

- RBNZ Inflation Expectations survey 3.0% (for the coming two year timeframe)
- UK final GDP +.5% as expected
- US Durable Goods -1.5% vs .7% expected
- US New Home Sales 323k vs 305k expected
- US Pending home Sales -11.6% vs -.9% expected
- Australian Private Capital Expenditure 3.4% vs 2.8% expected
- US GDP 1.8% vs 2.2% expected
- UK Nationwide House Price Index +.3% vs +.1% expected
- Fitch places Japanese credit rating on negative watch
- Moody’s downgrades credit rating of the four largest NZ banks

NZD/USD 
The New Zealand dollar performance last week was rampant to say the least. Resistance levels were swept away with ease as the momentum increased forcing many participants with sold NZD positions to buy these back.

The focus on the increased Govt Bond tender program increased further with the Minister of Finance Bill English on a road trip through Asia to speak with investors. The topside momentum remains in place with a new post float high of .8218 made Monday.

The USD remains weak across the board, enabling an easy road higher for the NZD.

Today's NBNZ Business Confidence number will be watched closely and in the US the employment numbers on Friday will provide further lead. Option related barriers should offer some resistance on the topside and these are usually based around the “big figure” levels such at .8300.

NZD/AUD (AUD/NZD)
The NZD outperformed the AUD last week. The NZD performance caught most participants off guard with its speed and strength.

Many investors with bought AUD positions against the NZD have been forced to reverse positions, and large volumes have been noted. 

In NZ this week the focus will be on the NBNZ Business Confidence survey due for release today, followed by building consents on Friday. The Australian focus starts with building approval numbers tomorrow, GDP on Wednesday,  and retail sales and trade balance numbers on Thursday.

Ironically from a historical perspective, the current levels still represent reasonably good value money transfers from AUD to NZD.

NZD/GBP (GBP/NZD)
The NZD continued its recent move higher against the GBP last week and remains poised to set new all time highs. The moment was all one way with a number of different factors seemingly in the New Zealand dollars favour. As the resistance levels broke, the move was self fulfilling, and the momentum remains with the announcement of the trade surplus at record levels for New Zealand.

In NZ this week the focus will be on the NBNZ Business Confidence survey due for release today, followed by the inflation hearings in the UK. Wednesday sees UK housing and manufacturing numbers, followed by construction numbers on Thursday. Friday sees NZ building consents, followed UK services data to round out the busy week.

A sustained break of the record high at .5031 does open the way for another run higher by the NZD, but maintaining these levels may prove difficult over time.

 
NZD/CAD
The NZD outperformed the CAD over the course of the last week. Along with the seemingly positive NZD news, the CAD’s closer correlation with the USD proved its undoing in the absence of any Canadian data.

This week sees Canadian GDP on Monday followed by the NBNZ Business Confidence number on Tuesday and the Bank of Canada cash rate decision on Wednesday. The cash rate will likely be unchanged but the accompanying statement will be closely watched. Progress from here should be harder fought by the NZD as we are out at 15 month extremes.

NZD/RAND
The NZD outperformed the RAND last week, as it did on all cross rates. The NZD’s fortunes we helped by comments made by Reserve Bank of South Africa Governor Gill Marcus. Marcus stated that cost-push inflationary pressures were not affected by monetary policy and therefore opened the way for South African inflation to ride outside their target band for longer than the market expected.

This week’s focus starts in NZ on Tuesday with the NBNZ Business Confidence survey, followed by the all important South African GDP number.

A break of the 5.77 resistance level opens the way for a move higher to the 5.83, although this remains unlikely this week.

NZD/EURO (EURO/NZD)
The NZD continued its recent appreciation against the EURO. There was plenty of news adding to the NZD’s momentum last week, and in the absence of any kind of resolution of the Greek/peripheral debt issues in Europe, expect the pressure to remain on the EURO in the short term.

Less stoic comments with regards to inflation from European Central Bank officials will be watched for closely this week, after Jean Claude Trichet’s softer tone on medium term inflation on Friday.

The NZ focus starts on Tuesday with the NBNZ Business Confidence survey, ahead of the monthly building consent numbers on Friday. The debt crisis will no doubt be in the headlines and it is positive to see other member states making efforts to try and avoid deepening the crisis further.

 
NZD/YEN (NZD/YEN)
The NZD outperformed the YEN last week, maintaining its momentum from the last couple of weeks. The shift to negative watch of Japanese credit rating by Fitch on Friday has not really added to the momentum of the NZD. The focus for the week is in NZ with NBNZ Business Confidence on Tuesday and monthly building consents numbers on Friday.

Expect any further appreciation of the NZD to be harder fought from around the current levels. A sustained break of the 66.50 opened the way to even heavier resistance at 67.50.

AUD/USD
Last week the AUD bounced impressively off the 1.0440 low. The softer economic data in the US has pushed US bond yields lower and this has maintained the weakness of the USD. While global growth prospects have softened somewhat over recent weeks, the interest rate differential between Australia and the US is taking precedence at this time.

Expect some range bound price action this week as the global outlook remains unclear at best.

The Australian economic calendar is busy this week, but the focus will be the GDP number on Wednesday, followed by retail sales and the trade balance on Thursday. In the US, the all important employment numbers are due on Friday, with the unemployment rate expected to remain at the lofty 9%.

AUD/GBP (GBP/AUD)                            
This pair remains in its familiar range. The AUD was under some pressure at stages during last week as the global growth story softens a little.

The GBP was given a small boost by more aggressive than expected comments from Bank of England Monetary Policy Committee members.

The focus this week starts in Australia on Tuesday with building approvals, ahead of the UK Inflation Report hearings before the Parliamentary Treasury Committee by Bank of England Monetary Policy Committee members. Wednesday sees Australian GDP figures released ahead of housing and manufacturing numbers in the UK. Thursday sees Australian retail sales and UK trade balance and construction to finish off a busy week.

 
AUD/EURO (EURO/AUD)
This pair was relatively stable last week as the EURO managed to halt its recent slide. The global growth profile appears to be softening a little and this did weigh on the AUD at stages. Countering this was a move lower on the long end interest rates in the core Euro zone countries highlighting softening of inflationary pressures.

Apart from the constant eye on the European debt situation, most of the focus this week will be on Australian economic data. Tuesday sees the monthly building approvals and private sector credit numbers released. Wednesday has the all important quarterly GDP numbers, followed by retail sales and the trade balance on Thursday.

GBP/USD
The GBP outperformed the US dollar through the course of the last week. The across the board weaker USD was helped lower by aggressive comments with regards to inflation made by Bank of England Monetary Policy Committee members.

Interestingly, the focus for the week starts on Tuesday with the UK Inflation Report hearings before the Parliamentary Treasury Committee by Bank of England Monetary Policy Committee members. Any comments with regards to timing of a cash rate hike will be reacted to.

The focus of the US data this week is undoubtedly the employment numbers on Friday. The unemployment rate is expected to remain stable at 9%, and any better than expected result would see a rebound from the perennially weak US dollar.

GBP/EURO (EURO/GBP)
The GBP outperformed the EURO in a grinding manner last week. In the absence of any kind of resolution of the Greek debt debacle, the main focus came from the outlook for interest rates. European Central Bank head Trichet’s softer comments about the prospects for medium term European inflation were contrasted by members Weale and Tucker of the Bank of England.

This week the UK Inflation Report hearings before the Parliamentary Treasury Committee by Bank of England Monetary Policy Committee members on Tuesday will be key drivers. UK housing and manufacturing numbers come Wednesday, ahead of construction numbers Thursday and services numbers Friday.

In Europe focus will remain on the potential outcomes in Greece and any further comments from ECB head Trichet who is due to speak on Thursday.

GBP/RAND
The GBP outperformed the RAND last week and the moves were predominantly driven by the changing of the interest rate differential. South African Governor Gill Marcus commented that cost-push inflationary pressure was not influenced by monetary policy and this flexibility means the next rate rise in South Africa is not expected until December.

This was contrasted by Bank of England Monetary Policy Committee members who made more 'hawkish' comments that have increased the chances of any earlier than expected move by the Bank of England to increase interest rates.

This week’s data focus is mainly on Tuesday with the UK Inflation Report hearings before the Parliamentary Treasury Committee by Bank of England Monetary Policy Committee members, and the all important South African GDP release.

Market commentary:

The last weeks trade on world financial markets proved to be interesting to say the least. Established correlations between different markets look to be taking a breather, with equity markets grinding higher in the face of softer economic data.

The softer economic data in Europe and North America looks to be reducing the pressure on the central banks to tighten monetary policy. As interest rates moved lower, the EURO and USD have underperformed accordingly.

Focus on the Greek debt situation remains, and the resolution negotiations remain intense.

In the US the lifting of the debt ceiling is still being hotly debated. The Australasian currencies remain relatively well supported in the face of the easing global growth profile.
 
The New Zealand dollar was the star performer last week. It has gained ground against all trading partners and is threatening record highs against the USD and GBP. Its form was driven by a number of different factors.

The Reserve Bank of New Zealand Inflation Expectations survey came out showing a 3% number. This is at the upper end of their target band and will continue to be monitored closely by the bank. The Fonterra payout was at a record level, as expected. Further re-insurance based inflows were also noted. A story carried by a local financial website, sparked global media attention on the Chinese interest in buying NZ Govt Bonds, as they have been doing for some time. Increasing the focus on the New Zealand Govt Bond market, was a trip to Asia by Finance Minister Bill English.

It appears prudent for the Treasury to be increasing issuance to meet demand at this time.  Any future tightening of global credit markets would sharply increase the cost of funding of the increased bond program in the future and this would be of further detriment to New Zealand’s finances. However the buyer of NZD Govt Bonds pays for them with New Zealand dollars. Therefore any large scale bond purchases tend to put upward pressure on the value of the New Zealand dollar, which is what we have saw last week.
 
Ratings agency Moody’s downgraded the four main NZ banks late on Friday. This brings them into line with their Australian parent banks, who also rely heavily on the offshore markets for funding. This week’s domestic focus will be on the NBNZ Business Confidence survey results on Tuesday, ahead of the monthly Building Consents Friday. The release of the highest trade surplus on record Monday will add to the upside momentum, that is quite undeniable now.
 
In Australia the domestic focus for the week was the stronger than expected Private Capital Expenditure number released on Thursday. The AUD did see some periods of heavy price action, especially against the New Zealand dollar. It rebounded sharply against the USD from its lows as US yield sustained a move lower for the time being. This coming week sees the Current Account and Private Sector Credit numbers released on Tuesday, the much anticipated GDP number Wednesday, and Retail Sales and the Trade Balance round out the busy week on Thursday. With continued Asian Central Bank diversification away from the USD, and the heavy nature of the EURO, expect the AUD to remain in demand for the most part. With current western interest rate tracks trending lower almost across the board, the AUD should remain supported with the Reserve Bank of Australia still on track to hike the cash rate in the coming months.
 
In the US economic data continues its patchy run. Housing and labour numbers remain subdued at best and this will be of concern to the Federal Reserve. This also carried through to the GDP number which was disappointing at 1.8% vs 2.2% expected. Talk of a third Quantitative Easing program seems to emerge as the data underperforms. This would undoubtedly be an outside chance, but something that should remain in mind. This coming week has the usual host of economic data due for release, but the highlight will be the monthly non-farm employment and unemployment rate numbers on Friday. The unemployment rate is expected to remain steady at 9%. Meanwhile the talks continue to find agreement on the lifting of the Federal debt cap, and negotiations will be closely watched.
 
The Great British Pound has performed relatively well over the last week, just giving up ground against the rampant New Zealand dollar. Final GDP numbers were unrevised at .5%, and relatively hawkish comments from Bank of England (BoE) Monetary Policy Committee members Weale and Tucker gave the GBP bulls a little enthusiasm on Friday. There are few that would argue that any real strength from the GBP is probably some way off, but if the likelihood of an increase in the cash rate from the BoE gains momentum, the fortunes of the GBP will improve with it. Tuesday this week sees the Inflation hearing of the BoE representatives before Parliaments Treasury Committee. Any comments with regards to the cash rate will be reacted to.
 
In Europe the Greek Government continues to scramble. Unilateral talks between political parties were unable to agree to a definitive austerity program, so the tension continues. Meanwhile the Italians have bought forward austerity measures in what looks to be an effort to stem the debt contagion from breaching their borders. Outgoing European Central Bank (ECB) head Trichet has made comments that medium term inflation is likely to be under control, and this contrasts his usual stoic nature with regards to inflation.  Indeed German inflation was released lower than expected last week and eases the pressure a little on the ECB to lift the cash rate.
 
The Canadian economy was mostly off the radar with little in the way of economic news last week. The CAD was generally lower in line with the US dollar. This week sees the monthly GDP number released on Monday ahead of the Bank of Canada cash rate announcement on Tuesday. The cash rate is widely expected to remain unchanged and the accompanying statement will be closely watched.
 
Ratings agency Fitch has placed the Japanese credit rating on negative watch as the economy slows and the disaster clean up costs rise.
 
In South Africa  the South African Reserve Bank Governor Gill Marcus stated that that there is little that monetary policy can do to stifle cost-push factors that are increasing the costs of oil, electricity and food. With this in mind expect that rates will remain lower for longer with the market picking the next cash rate rise in November amongst a climate of high inflationary pressure. Expect GDP figures due for release on Tuesday to be closely watched.

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Sam Coxhead is a currency analyst with DirectFX You can contact him here >>