by Mike Jones
NZD
It was a wild ride in the NZD last week as domestic and global drivers pulled the currency in opposing directions.
In the end, the NZD/USD finished the week close to where it started around 0.7900. This was still enough to claim the title of strongest performing G10 currency over the week.
Improving domestic ‘fundamentals’ allowed the NZD to shrug off a broad strengthening in the USD last week. Not only did dairy prices continue to stabilise, but Q1 NZ GDP expanded a jaw dropping 1.1% (against analyst forecasts of 0.4/0.5%).
Overall, last week’s positive local news further reinforced the notion that, failing a European implosion, the RBNZ will not be cutting interest rates anytime soon. The implied odds of a 25bps cut in July fell from 45% to around 20% over the week, underpinning modest gains in NZ swap yields.
The NZ dollar’s yield differential increased accordingly. Three-year NZ-US swap differentials rose from 215 to 230bps. Periodic bouts of aggressive NZD/EUR buying also bolstered NZD sentiment last week.
With the chances of additional policy easing from the Bank of England, US Federal Reserve and ECB rising by the day, we suspect NZ dollar interest rate differentials are biased to continue widen. This supports our view dips below 0.7500 in NZD/USD are unlikely to be sustained.
For this week, Thursday’s NBNZ business survey looks set to be the highlight of an otherwise quiet NZ data week. We’re expecting net confidence to soften (on Europe fears) but for own-activity indicators to hold up at reasonably robust levels.
As ever though, currency market sentiment looks set to be determined in Europe. All eyes are on the EU Summit, beginning Thursday. Markets are hopeful that European policy makers will finally get their act together and take decisive action to address the EU debt crisis (see Majors).
Certainly, there is a chance that a positive outcome from the Summit spurs a relief rally across risk assets like the NZD. But the bigger risk is that investors’ high hopes are dashed.
This would undoubtedly knock back risk sentiment and dampen enthusiasm for the ‘growth-sensitive’ NZD. Such an outcome could see the NZD/USD test support at 0.7730, and eventually 0.7500.
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Majors
Currency markets ended last week in consolidation mode. Most of the majors shuffled sideways in tight ranges.
The night started with the EUR leading the major currencies lower. Not only did the German IFO fall to the lowest level in two years (105.3 vs. 105.6 expected), but rumours circulated Spain was on the cusp of asking for a sovereign bailout. European equities headed lower and the EUR/USD slipped below 1.2520.
Later in the night, news the ECB was relaxing its collateral rules rescued risk sentiment and the EUR. US stocks notched up small gains, the EUR recovered its losses, and risk-sensitive currencies ended the night up slightly.
There was little reaction to Friday’s meetings between the ‘big four’ European leaders, and European finance ministers.
Looking ahead, there isn’t a lot of data to get excited about this week. Although, with the Fed throwing the door open to more quantitative easing last week, US durable goods orders and new home sales figures may come in for some attention. With QEIII on markets’ radar, soft US data may begin to weaken the USD rather than the usual reaction to buy the USD as a ‘safe-haven’.
The EU Summit (starting Thursday) looms large as the major piece of event risk this week.
Much hope and expectation rides on it. Market participants are plumping for the introduction of crisis-fighting measures involving some mix of euro-wide deposit insurance, steps towards political and banking union, a roadmap for Eurobonds to be introduced, and allowing the European bailout funds to purchase peripheral sovereign bonds.
The risk of disappointment is high. If there is one thing we have learned from the European crisis to date it is that politicians are prone to disappoint, and policy fixes take time to implement.
A failure to take decisive action would be consistent with some near-term paring of risk-appetite, and a pull-back in the EUR and pro-cyclical currencies like the NZD and AUD.
Other news: Greece submits an updated bailout plan likely to meet fierce resistance from Germany & the Troika. Merkel, Rajoy, Monti and Hollande propose a growth package worth around €130B (1% of EU GDP). EU finance ministers fail to agree on whether the €100b loan to Spanish banks will be given senior status (thereby subordinating existing bond holders).
Event Calendar:
25 June: US Chicago Fed index; US new home sales; US Dallas Fed index; 26 June: RBA’s Debelle speaking; UK public borrowing; US Richmond Fed index; US consumer confidence; SP budget balance; Italy sells bonds; 27 June: NZ trade balance; GE CPI; US durable goods orders; US pending home sales; 28 June: NZ business confidence; JP retail trade; AU home sales; GE unemployment; UK & US final Q1 GDP; UK Q1 current account; US jobless claims; IT bond auction; EU leaders Summit kicks off; Fed’s Pianalto speaks; 29 June: NZ building permits; JN jobless rate, CPI, and industrial production; EU CPI; US personal spending; US Fed’s Bullard speaking; US Chicago PMI; 1 July: CH manufacturing PMI; 5 July: ECB.
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