By Mike Jones
NZD
The NZD has pushed modestly higher since our last report on 23rd December. In fact, the NZD has been one of the strongest performing G10 currencies.
Markets barely stirred between Christmas and New Year. A dearth of news and waning volumes saw the NZD/USD shuffle sideways in a 0.7700-0.7800 range.
However, 'risk-sensitive' currencies like the NZD have got off to a solid start in 2012 thanks to a spate of encouraging global data. The Chinese manufacturing sector lurched back into expansion mode (the PMI rose from 49.0 to 50.3), December US manufacturing activity exceeded expectations (the ISM index increased to 53.9 vs. 53.5 expected), and German unemployment recorded a surprise fall.
US equity markets have started the year in the black (the S&P500 is up 1.6% for the year) and our risk appetite index (which has a scale of 0-100%) has climbed from 43.2% on 23rd December to 50% currently.
The more positive global sentiment dragged the NZD/USD up from around 0.7750 late last year to almost 0.7900. Meanwhile, NZD/EUR surged to 5-month highs around 0.6150 alongside the tumbling EUR.
Nonetheless, the NZD/USD lost a little of its lustre on Friday night thanks to a firmer USD. A stronger-than-expected December US jobs report buoyed USD demand, sending the NZD/USD sliding back towards 0.7800.
As we look into 2012, we expect slowing global growth and ongoing European debt dramas are to suppress investors’ risk appetite and commodity prices through H1 2012, keeping the 'risk sensitive' NZD/USD heavy. Recovering USD sentiment will only add to the downward pressure on the NZD/USD. Formally, we forecast the NZD/USD at 0.7400 by the end of the March quarter. For more details on our 2012 NZD outlook, see our 2012 NZD Roadmap, to be released shortly.
For this week, investor focus is likely to remain on Europe and its debt woes. Not only are the Bank of England and ECB due to meet, but tonight’s Merkel/Sarkozy meeting will also occupy traders’ attention. Slowing European growth and policy inaction means further upward pressure on NZD/EUR is likely. August’s 0.6170 high looms as the immediate target.
Meanwhile, recovering USD sentiment will mean the NZD/USD will struggle to sustain rallies above 0.7905 this week, in our view. For today, keep an eye out for NZ November trade balance figures (market expectations -NZ$300m, BNZ -NZ$377m), due at 10:45am.
Majors
The USD has marched higher since our last report on 23 December. Not only has the USD benefited from continued “safe-haven” flows associated with the euro crisis, but a string of upbeat US economic news has also underpinned the USD early in the New Year.
Friday night’s non-farm payrolls data carried on the theme of encouraging US data. The US economy created 200k jobs in December, stronger even than the solid 155k analysts had been picking. The US unemployment rate fell from a revised 8.7% to 8.5% – the lowest since February 2009.
In the wake of the figures, the USD index climbed to its highest level in 16-months as investors reduced the odds of further quantitative easing from the US Federal Reserve.
Still, the payrolls figures did not translate into higher US bond yields – in fact 2- and 10-year US Treasury yields dribbled lower on Friday.
The firmer USD has served to knock many of the major currencies lower early in the New Year. The EUR has lead the declines, thanks to more uninspiring data (we forecast a European recession through Q4 & Q1), and ongoing sovereign debt worries. From around 1.3050 on 23 December, the EUR/USD has collapsed to 16-month lows below 1.2700. Declines in the GBP have been more limited, as the pound remains the “safe-haven” European currency of choice. The GBP/USD has lost around 1.5 cents over the past fortnight (to 1.5400), while EUR/GBP has plunged to the lowest since September 2009.
While low liquidity has spurred often skittish trading in currency markets of late, conditions should begin to normalise over the next week or so as traders return from holiday. There are also some important events to watch out for that might help shape currency market sentiment.
Europe’s percolating debt crisis will remain in focus. French President Sarkozy and German Chancellor Merkel are due to meet tonight, although it’s unlikely anything market moving will come out of the meeting. More important will be Italian (€7.5b) and Spanish (€5b) bond auctions and monetary policy decisions from the ECB and Bank of England on Thursday. Markets expect no change in policy rates and unconventional policies.
Elsewhere, there is a fairly packed global data schedule to keep an eye on and the start of the Q4 US corporate earnings season tonight. Analysts expect just 6.1% revenue growth for S&P500 companies. All up, we suspect investors will remain keen to sell the EUR/USD on rallies, although record net EUR short positions could spur the odd short squeeze.
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