There were no lasting positives for the NZD from the GDP figures

By Mike Jones

NZD

Talk about the Grinch who stole Christmas.

How deflating is it to be delivered a wonderfully wrapped present only to find that what’s inside is somewhat less than inspiring.  That was very much the story with yesterday’s third quarter NZ GDP figures.

GDP may have been on the high side of expectations (0.8% vs. market expectations of 0.6%, BNZ 0.7%), but the detail revealed a softer underbelly. Indeed, significant downward revisions to historic data reduced the level of GDP a cumulative 0.9% relative to our previous understanding.

There were certainly no lasting positives for the NZD from the GDP figures. After a brief spurt higher on the numbers’ release, the NZD/USD spent the rest of yesterday afternoon drifting lower.

However, it was a different story through the overnight session.

Some early festive cheer in equity and commodity markets bolstered sentiment towards “risk-sensitive” currencies like the NZD after solid US data spurred optimism about the US recovery. The S&P500 rose 0.9% and our risk appetite index (which has a scale of 0-100%) climbed to nearly 50%.

The positive sentiment saw the NZD/USD lift from 0.7670 to closer to 0.7750. Still, there was nothing to trouble our view the 0.7500-0.7850 range will continue to contain the NZD/USD in the short-term. 

Looking ahead, don’t be surprised to see more choppy and rangy price action through the Christmas and New Year period as volumes continue to thin out. Fundamentals should begin to reassert themselves from early in 2011.

In this regard, we expect to see the NZD/USD resume its downward trend earlier in the New Year as the USD enjoys further support, NZ economic data remains patchy, and NZ interest rates bob around recent lows.

Majors

The USD traded marginally weaker overnight. However, with markets well and truly in Christmas wind-down mode, liquidity was thin and conviction generally lacking.

Global equity and commodity markets enjoyed a bit of festive cheer, which was reflected in the outperformance of the “risk sensitive” AUD, NZD, and CAD and general underperformance of the “safe-haven” USD and JPY.

The German DAX rose 1.1%, the UK FTSE closed up 1.3% and the S&P 500 is currently up around 0.8%. Oil prices notched up a 1.2% gain while the broad CRB commodity price index posted a modest 0.6% gain.

Bolstering market sentiment, last night’s US economic data continued to beat expectations, raising hopes the US economy will find its feet in 2012. Admittedly, Q3 US GDP was revised down a touch (1.8% annualised, from 2.0%). However, this was more than offset by a surprising fall in US jobless claims (364k vs. 380k expected) – to their lowest level since April 2008 – and a solid reading on consumer confidence (69.9 vs. 68.0 expected).

Upbeat equity market sentiment and rising commodity prices encouraged investors to trim “safe-haven” exposures in favour of the “commodity-linked” currencies. USD/CAD slipped from 1.0260 to around 1.0210, and the AUD/USD was pushed up around ½ cent to 1.0140.

There was relatively little action in the European currencies. News third quarter UK GDP was revised higher (from 0.5 per cent to 0.6 per cent), barely troubled the GBP. It seems traders remain focused on the likely sharp slowing in UK activity in 2012.

Looking ahead, we expect heightened risk aversion and further improvement in the US economy to drive a mild USD recovery early next year. This should see the EUR remain under pressure and the “growth-sensitive” AUD and NZD continue to trade heavily. It’s worth reiterating, our central scenario sees the Euro area struggling along and not breaking up but, as ever, risks abound.

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