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Central bank meetings to dominate sentiment this weak. US growth concerns lurk.

Central bank meetings to dominate sentiment this weak. US growth concerns lurk.

By Mike Jones and Kymberly Martin

It was a volatile ride in the NZD/USD last week. After squeezing up to a post-float high of around 0.8260, souring global risk appetite knocked some of the wind out of the NZD/USD such that it finished the week around 0.8150.

The NZD was torn between opposing forces last week. On the one hand more evidence of NZ economic resilience underpinned the NZD. Overall last week’s data supported our view the NZ economy is slowly dragging itself back to its feet, despite the havoc wrought by the Christchurch earthquake. Figures on the trade balance, commodity prices and business confidence were all fairly encouraging, prompting OIS markets to bump up expectations of RBNZ rate hikes to 70bps over the coming 12 months (from 60bps at the start of the week). With US bond yields in retreat, this saw NZ-US 3-year swap differentials rise from 270bps to around 280bps.

On the other hand investors’ subdued appetite for risk weighed on the NZD. Mounting worries about a global economic slowdown knocked back risk appetite last week following a slew of weaker-than-expected global data (including Friday’s all important US non-farm payrolls). Indicative of such, the MSCI World Equity Index fell 1.4% over the week and our risk appetite index (which has a scale of 0-100%) slid from around 72% to closer to 63%. Depressed risk appetite saw investors trim positions in “growth-sensitive” currencies like the NZD in favour of “safe-haven” currencies like the USD and JPY.

On Friday night the NZD underperformed most of its peers. Despite support from a broadly weaker USD, a bout of heavy NZD/AUD selling from custodial and real money accounts kept the NZD/USD under pressure. From above 0.8150, the NZD/USD skidded back to almost 0.8080 before stabilising in a 0.8120-0.8180 range overnight.

Looking ahead, central bank meetings will hog the limelight this week. The ECB, Bank of England, RBA and RBNZ are all due to meet. The RBA is expected to keep rates on hold at 4.75% this afternoon (4:30pm NZT), but analysts will be scrutinising the accompanying statement for hints a near-term rate rise is on the cards.

Thursday’s RBNZ Monetary Policy Statement will be the highlight of the local data week. We suspect it will be a much firmer document than the earthquake-rattled MPS of March, given the increasing signs of strong GDP growth in the pipeline and, more to the point, inflation headaches in the making. On balance we think the Bank will signal a late-2011 start to its tightening cycle, similar to that inferred from the March MPS. As a result we suspect NZD/USD dips below 0.8000 will not be sustained this week.

Majors

Since our last report was published on Friday the USD has weakened relative to most of the major currencies.

Friday night’s US non-farm payrolls report showed a much smaller-than-expected jobs gain of just 54k in May (+165k expected). In addition the US unemployment rate rose to 9.1%, its highest this year. Renewed fears about a marked slowing in US growth momentum saw US bond yields slip 3-5bps, weighing on the USD.

A bout of aggressive EUR/USD buying also provided headwinds for the USD on Friday after a significant easing in the Greek debt crisis. Eurogroup head Juncker said they agreed to pay the next instalment to Greece under last year’s €110bn bailout, thereby reducing the odds of a default. The Troika (EC/ECB/IMF) examining Greece’s austerity progress reported that there were encouraging signs of a pick up in economic activity recently, in particular a notable pick-up in exports. Greece also agreed to €78bn in further austerity measures and assets sales in order to secure the next €12b in EU/IMF bailout money. Greek, Irish and Spanish sovereign credit spreads narrowed slightly and the EUR/USD was propelled from below 1.4500 to around 1.4630.

Overnight the USD clawed back a small part of Friday’s losses after a mild increase in risk aversion bolstered demand for “safe-haven” currencies. Global stock markets fell for a fourth straight session reflecting lingering concerns about slowing global growth. The German DAX slipped 0.3%, the French CAC 40 fell 0.7% and the S&P500 is currently down around 0.8%. The VIX index (a proxy for risk aversion) ticked up from around 17.5 to almost 18.5.

Against a backdrop of weak equities and subdued risk appetite, “safe-haven” currencies like the USD and JPY outperformed. USD sentiment also received a boost from hawkish Fed rhetoric. Philadelphia Fed President Plosser said a Fed rate rise was “certainly possible by the end of the year.”  Against the firmer USD, the EUR/USD skidded from 1.4650 to below 1.4600, helped by comments from a German official suggesting a second Greek bailout is not yet a certainty. Meanwhile the GBP/USD was knocked from 1.6440 to around 1.6350 after the IMF said the Bank of England may need to consider additional quantitative easing.

The coming week will be a real test for Greek Prime Minister Papandreou who faces growing dissent from within his Socialist party over deeper budget cuts and asset sales. Also likely to impact the EUR will be whether ECB head Trichet signals a July rate hike at Thursday night’s post policy meeting press conference.

No chart with that title exists.

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.

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11 Comments

The future - consistent value of your declining NZ$  - no need for banks, BUT.... ?

Bitcoin - business grows.

http://www.bluishcoder.co.nz/2011/03/26/bitcoin-continues-to-grow.html

 

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You're up late , Walter  ..... My computador can't make cents of that Bitcoin link ..... Can you explain it to me , centsibly ?

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 Roger – I think it doesn't make sense for someone equipped like a Neanderthal – to explain highly technical issues.  

 http://en.wikipedia.org/wiki/Bitcoin

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Don't be so hard on yourself Walter , Cro-Magnon man maybe , but you're no Neanderthal ......... I have faith that you can explain highly technical issues ......

....... got two rocks , close at hand ?

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..too late for doing (more) damage - Rogie.

 Are the two smilodons still threaten Lowburn ?

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Been awhiles since sabre toothed pussies & the Gummster have frequented Loburn , Walter .

...... meebee you could take some time out and teach clay-court tennis to that chappie from your land , ... Fed-Ex they call him ? ...... Tell him not to be such a big pussy choker , he's Swiss , not Australian .

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I seem to recall those occer chokers whispering in a certain halfbacks ear....."four more years boys ..four more years"........ no doubt we have heard it in French /Yarpie......

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Ah yes , the Zambian fellow , George Gregan , threw that one at Justin Marshall , is mammary serves ........

....... and Gummy love to hurl the same   barb  at the lefties , Goofy-Klinger-Cunny , 3 more years team , 3 more years !

 

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It was actually Byron Kellarher he came on in the last Ten minutes.......sob....that little grogan Gregan....has tormented me since.

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Muchos grassius , mon army ! ...... Your mammary , Count , is bigger & more pliable than the Gummster's .

........ Wasn't Byron Kellehar knocking around with some Yankee porn-star slapper .... ..?

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Indeed  he was GBH....maybe still is....lucky lucky boy....still we all drown our sorrow the best way we know how........just to get over the hump....or not as the case may be.

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