By Mike Jones
NZD
The New Zealand dollar is currently under relatively strong downward pressure and is now trading around three cents lower than its mid-February peak of just over USD0.85.
Three key factors are leading to nervousness about the local dollar:
- The US economy is looking stronger by the day;
- The Chinese economy is stabilising but looks sufficiently weak to hamper economies such as New Zealand’s directly and, more substantively, indirectly via its impact on Australia; and
- Most importantly, drought conditions in New Zealand are becomingly more widespread and vicious.
While these themes are maintained it’s hard to see buyers of the NZD emerge in droves.
In this regard, nervousness about the impact of the drought is likely to be exacerbated by what is now likely to be a swathe of front page stories about those affected. Moreover, the weather forecast for the next few weeks suggests very little, if any, rain.
One has to be careful, however, not to simply look at past drought events and extrapolate the GDP outcomes from these because previous droughts have often been accompanied by severe weakness in global demand (such as the Global Financial Crisis and Asian Crisis) and/or relatively tight monetary conditions.
On this occasion, interest rates are exceptionally low and global demand appears to be on the improve. In addition the economy is set to receive a massive stimulus from the rebuild of Christchurch.
It is important that both sides of the story are kept in view as there will be plenty of potential for surprise (on both sides of the agenda) over the next few months.
For now, we are sticking with our view that the medium term outlook is for a stronger kiwi dollar but recognise that in the nearer term downside risks dominate.
The latest gyrations of the NZD were as follows . . .
- The NZD/USD staged a 40 point rally after NZ markets closed on Friday, reaching levels around 0.8290.
However, the release later in the NZ night of the US Jobs report triggered a widespread USD rally against all currencies, including kiwi. It fell rapidly to levels just under 0.8200 in a matter of hours, closing in NY last Friday around 0.8215.
- NZD also suffered against the AUD with the cross falling to the low 0.80s, the ongoing drought and potential long term fallout to NZ agricultural production being the apparent source of this.
This morning we are once again re-testing the NZD/USD lows following Saturday’s mixed Chinese data for Feb, which showed weaker activity, but higher than expected inflation data.
It’s pretty hard to find reasons this morning to buy NZD, other than the very significant nearby support at 0.8150 likely to keep a floor under the kiwi.
But the ongoing drought concerns, potential M&A flows, follow through USD strength after Friday’s job data, and fresh China data will likely keep today’s trading range tilted to the left. Look for a 0.8160/0.8210 range on the day.
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Majors
The story of the weekend was further confirmation that the US economy is finding its feet at a time when uncertainty about the Chinese outlook remains.
The 236k increase in US non-farm payrolls was very much on the high side of expectations and the fall in the unemployment rate to 7.7% was also a pleasant surprise.
This resulting support for the USD saw it climb against most of the majors. In particular, the currency rose to its highest level against the Yen since mid-2009 aided and abetted by a generally weakening Yen on the back of deteriorating current account figures.
Of course, the Yen continues to suffer from expectations that the incoming Governor of the Bank of Japan will do whatever is necessary to create inflation.
While the Yen is under pressure Pound continues to win the recent battle for worst performing currency having dropped almost 4.0% against the USD over the last month. Indeed this decline is double the second worst performing currency – the Swiss Franc.
The demise of the Pound comes despite the BOE maintaining an unchanged policy stance at last week’s meeting but was aided and abetted by Prime Minister Cameron’s comments that he was looking for further help from the BOE and expected further weakness in the currency.
Chinese data over the weekend revealed lower than expected growth data matched by higher than expected inflation. On an annual basis Industrial production was up 9.9%, retail sales 12.3%, exports 23.6% and imports 15.2%. This general weakness weighed on the AUD and, in turn, NZD.
Other News:
*BNZ Confidence Survey rose to a 19 month high of 40.6.
*Fitch downgraded Italy to BBB+, with negative outlook, from A- .
*Fed’s Bullard says there should be no hurry for the Fed to adopt an exit strategy from its current stimulus programme.
Event Calendar:
11 March: NZ electronic card transactions; JN machinery orders; German trade balance.
12 March: AU NAB Business Confidence.
14 March NZ RBNZ MPS; AU Employment; ECB Monthly Report; US Jobless claims,
16 March NZ: PMI.
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