NZD/USD breaks through post float high, but drops back. Greek tragedy continues to play.

By Mike Jones and Kymberly Martin

Yesterday’s merchandise trade statistics for April, were the latest in a series of data releases pointing towards underlying resilience in the NZ economy.

The April trade surplus was a whopping $1.11b, more than $500m north of market expectations. In the wake of the encouraging trade numbers, the NZD/USD was squeezed up from below 0.8200 to 0.8218 – the highest level since the March 1985 float.

However the spurt above 0.8200 proved short-lived for the NZD/USD. Later in the afternoon European sovereign debt jitters reared up again, denting investors risk appetite and knocking some of the wind out of “growth-sensitive” currencies like the NZD. ECB board member Bini Smaghi said a Greek restructuring would be a “death penalty”. In response, the EUR/USD shed around ½ cent, dragging the NZD/USD back towards 0.8180.

Overnight currency markets barely budged with holidays in the UK and US keeping financial markets subdued. The NZD/USD shuffled sideways in a 0.8160-0.8185 range.

New Zealand’s economic schedule boots back up this week with this afternoon’s NBNZ business survey the crux of it. We expect this to register a further uplift in confidence with activity expectations remaining consistent with the solid GDP growth we expect ahead. Elsewhere Wednesday’s Overseas Trade Indexes should reflect ongoing strength in NZ’s terms of trade and later in the week the ANZ commodity price index and Fonterra’s milk price auction will provide timely updates on whether NZ export prices are sustaining recent gains.

Should this week’s local data fulfil our positive expectations, the NZD is likely to remain in favour. Indeed, yesterday’s push through the post-float high only strengthened the uptrend. As a result we expect NZD/USD dips to be limited to 0.8100 this week, failing any noticeable deterioration in the global backdrop.

Along with the NBNZ survey (1pm NZT), a slew of Australian data (due 1:30pm NZT) will also be worth keeping an eye on today.

Majors

It was a bit of a snooze fest in currency markets overnight. Holidays in the UK and US meant volumes were extremely thin. The USD index tracked largely sideways in a narrow 74.80-0.7500 range.

The EUR started the week on the back foot thanks to renewed worries about Greece’s debt dynamics. ECB board member Bini Smaghi said it was a “fairytale” to think Greece’s sovereign debt could be restructured in an orderly way and a restructuring would be a “death penalty”. Spanish, Portuguese, and Greek sovereign bond spreads (over German 10-year bond yields) ticked up, knocking the EUR/USD from 1.4330 to around 1.4280. European stock indices slipped 0.1-0.3%.

Keep an eye out for EU/IMF officials’ progress report on Greek austerity due late this week. This is widely expected to signal whether or not Greece will gain access to the next tranche of bailout money.

Last night’s Canadian data was a little uninspiring, continuing the recent theme of disappointing global economic data. Quarterly (annualised) GDP undershot analyst forecasts slightly (3.9% vs. 4.0% expected) and current account figures were more negative than expected (-$8.9b vs. $7.2b expected). In response, USD/CAD jagged up from 0.9755 to almost 0.9790, before giving back part of these gains later in the night. Analysts expect the Bank of Canada will keep interest rates on hold at 1% when it meets tonight.

Along with the continuing Greek debt dramas, expect plenty of market focus on this week’s US data. US growth momentum has started to slip recently and worries about how the US will cope with the end of the Fed’s QEII stimulus program in June have knocked US bond yields and the USD significantly lower. This week’s swathe of US data will help determine whether this continues. In particular all eyes will be on the heavy hitting double act of Wednesday’s ISM manufacturing survey and Friday’s non-farm payrolls (a 185k jobs gain is expected). In the near-term, support on the USD index is eyed towards 74.40 with resistance at 76.00.

Fixed Interest Markets

Yesterday’s buoyant merchandise trade figures had only a minimal effect on interest rate markets.

The swaps curve steeped ever so slightly with swap yields rising 1-2bps across the curve. The subdued reaction likely reflects anticipation of today’s more important NBNZ business confidence survey.

As noted above, we are expecting a reasonably positive result with business activity expectations remaining consistent with the solid GDP growth we expect ahead. If we are right, we’d expect to see more flattening pressure exerted on the NZ yield curve as short-dated yields rise but the long end remains anchored by low global yields.

Overnight, UK and US bond markets were closed for holidays. So there will be little offshore direction for local rates on the open today.

See our interactive swap rates charts here and bond rate charts here.

Mike Jones and Kymberly Martin are part of the BNZ research team. 

All its research is available here.