Chinese inflation higher; commodity prices lower

By Mike Jones

NZD

The NZD remains firmly in consolidation mode. After sliding to 0.8320 yesterday morning, the NZD/USD spent the overnight session grinding choppily higher towards 0.8360.

Yesterday’s HLFS revealed the NZ labour market is ticking along, but not much more. It was tempting to point to the drop in the unemployment rate to 6.3% in Q4 (from 6.6%) as a marked improvement. But, given it came via a dip in labour force participation and only a modest 0.1% gain in quarterly employment, we wouldn’t get carried away. The currency certainly didn’t. The NZD/USD just dribbled towards the bottom of its recent range around 0.8320.

Yesterday’s Chinese inflation figures provided some temporary headwinds for the NZD and AUD. The surprisingly firm result (4.5%y/y vs. 4.0% expected) saw investors scale back the extent of Chinese policy easing expected this year (or write it off altogether). In response, commodity prices dipped and AUD/USD skidded to almost 1.0750.

Overnight, firming risk appetite and a perky EUR allowed the NZD/USD to recover a bit of lost ground. Global equity markets notched up small gains and the EUR rallied after the ECB did its best to backstop confidence in the euro zone (see majors). Our risk appetite index (scale 0-100%) ticked up to a NZD-supportive 59.3%. Nek minnit, the NZD was higher again. NZD/JPY climbed from 64.40 to a 5-month high around 64.80, helping lift the NZD/USD back up to 0.8360.

Squinting your eyes through the recent volatility, the NZD/USD has spent the past week or so simply consolidating in a 0.8300-0.8400 range. As we noted on Tuesday, NZD fundamentals have improved, but the extent of recent NZD/USD gains have left the currency a little overstretched. As a result, the NZD/USD is facing increased resistance on bounces towards 0.8400. This should continue near-term.

Today’s Chinese data is for January, and similar to yesterday’s CPI, may be Lunar New Year affected. It is likely to be weak because of these holidays. If we’re right, “risk sensitive” currencies like the NZD and AUD could lose a bit more steam. The RBA Statement of Monetary Policy and NZ electronic card transactions will also be worth a look on the day.

Majors

Further, modest, USD weakness underpinned most of the major currencies overnight.

The EUR led the gains against the USD. In choppy trade, the EUR pushed around ¾ cent higher against the USD, to above 1.3300, and notched up solid gains against the crosses. Most of this EUR strength came after the ECB meeting. 

The ECB kept rates on hold, (at 1.0%) as expected, but appeared to signal the threshold for further rate cuts is higher than investors had thought. Indeed, the ECB saw only “downside” risks to the economic outlook, a change from the “substantial downside” risks seen in January.

Instead of rate cuts, it seems that, for now, the ECB intends to use its Long-Term Refinancing Operations to support euro zone banks and the real economy. President Draghi said he hoped that the take-up in the February 3-year tender would be as large as the December auction (around €500b). We believe that it could easily be double that number.

Draghi again poured cold water on the idea the ECB or EFSF could write down Greek bond holdings to help with Greece’s debt restructuring. So there wasn’t the extra EUR boost from ECB assistance for Greece. But we did (finally) get Greek political agreement to pass all of the required austerity measures overnight. This helped underpin the EUR further, although reaction was modest given agreement was largely already priced. 

As expected, the Bank of England MPC voted to maintain its policy rate at 0.5% but increase its asset purchase programme by £50b to £320b. Markets had priced a small chance of a larger (£75b) increase. As this was priced out, GBP/USD enjoyed a brief ½ cent spurt to around 1.5880. 

BoE asset purchases are due to finish in April. This raises the question of what the MPC will do in May. We suspect they will ease further (to the tune of £25b). This ongoing stimulatory policy stance, combined with a low and slow UK economic recovery, should set the stage for further GBP underperformance (we forecast GBP/USD at 1.5600 by June).

Looking ahead, attention in Europe now turns to whether euro zone finance ministers can cobble together another bailout package for Greece. Expect more choppy, headline induced EUR trading. In the short-term, we suspect the ECB’s vote of confidence in the euro zone outlook will limit EUR/USD dips to around 1.3210.

All its research is available here.