By Mike Burrowes
The NZD has posted steady gains over the past 24 hours despite most of the other major currencies weakening against the USD. The NZD has been supported by decent investor and commercial demand. NZD/USD started yesterday around 0.8120 and rallied to just below 0.8200 overnight. NZD/USD is currently trading around 0.8160.
The NZD has also performed well on the crosses with the trade-weighted index up 0.60% over the past 24 hours. NZD/GBP has surged from 0.5000 back to within a whisker of the historic high around 0.5085, reached on the 10th of June this year. The strength in the cross is thanks to dovish BoE minutes overnight (see below). NZD/EUR has risen steadily from 0.5640 to around 0.5680 currently. NZD/AUD has popped above 0.7700 after starting yesterday around 0.7660.
Interest rate differential are helping to support the NZD. The OIS market is currently pricing over two hikes from the RBNZ over the next 12 months. This contrasts to the RBA where there are no rate hikes priced for the next 12 months and the BoE where they have suggested further QE may be needed.
NZ’s latest current account deficit result was marginally better-than-expected (4.3% vs 4.4% y/y expected). The details revealed that the narrowing in the deficit was largely driven by underwriting losses of local subsidiaries from the Christchurch earthquakes. There was very little reaction in the NZD to the release.
Looking to the day ahead, the Government is expected to announce the options for insured homeowners in Christchurch. Details leaked so far suggest the announcement will cover the home owners in the six worst hit suburbs. Aside from this, the NZD to will take its direction from offshore developments. Expect support around the 0.8120 and resistance around the 0.8200 on the day.
Majors
The USD index has spent the past 24 hours chopping between gains and losses but is currently up around 0.30% over the past 24 hours. The move higher in the USD has been supported by equity markets. The Euro Stoxx 50 ended down 0.25% and the S&P500 is currently down 0.65%.
Overall the FOMC statement and press conference from Chairman Bernanke has seen some USD buying. The USD buying started after Bernanke noted in the press conference that “extended period” meant for the next 2-3 meetings.
The Fed cut its forecasts for U.S. economic growth but offered no hint of further monetary support as they expect growth to pick up in 2012. Indeed, they largely attributed the recent economic weakness to higher commodity prices and supply chain disruptions from Japan's devastating earthquake, noting that these factors are temporary. The Fed was more dovish on the inflation front, noting “inflation has moved up recently but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate”. As expected, the Fed also confirmed it was ending its $600 billion bond-buying program at the end of the month while reiterating that it will continue to reinvest principal payments from its holdings.
The BoE minutes were more dovish than the market expected, noting “it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialised”. As expected the vote was split seven in favour of no change and two in favor of a hike. In response to the minutes, GBP/USD plunged from 1.62 down to around 1.6100 initially. The small rise in the USD post the FOMC decision has pushed GBP/USD down to 1.6080 currently.
The Greek government survived yesterday’s confidence vote. In FX markets it was a classic case of buy-the-rumour and sell-the-fact. After the vote EUR/USD fell from around 1.4400 down to 1.4350 during the day and dragged most of the other major currencies lower as well. The EUR/USD is currently trading around 1.4350. The next major hurdle for the Greek government will come next Tuesday when they try to pass the austerity measures.
The night ahead has the release of several pieces of second tier data. In Europe we get the release of PMI Manufacturing and Services for June. In the US markets will be focused on the Chicago Federal National activity index for further conformation of a slowdown in US growth. We also have the release of US New Home sales for May.
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See our interactive swap rates charts here and bond rate charts here.
Mike Burrowes is part of the BNZ research team.
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