By Mike Jones
NZD
The NZD has been the strongest performing currency over the past 24 hours, shrugging off a EUR-inspired firming in the USD. The NZD/USD spent most of the overnight session consolidating 20 points either side of 0.8200.
Dips in the NZD continue to be met with heavy buying from the local export community. Strong hedging demand from this sector provided a steadying influence on the currency yesterday.
From 0.8180, the NZD/USD was squeezed back above 0.8200. These gains were sustained through the offshore session, despite a miserable night for the EUR.
A solid result from last night’s GDT dairy auction further bolstered NZD sentiment. Dairy prices did decline 2.1%, on top of the 7.3% fall at the last auction.
But given the stiff headwinds from the higher dairy volumes on offer (5.6% above previous forecast) and a stronger USD this should actually be viewed as a pretty decent result. Dairy prices are still up a whopping 73% on year-ago levels.
We don’t expect this afternoon’s NZ Budget to provide many surprises for markets. If anything, we suspect the reception will be positive.
The Budget is expected to reveal a more assured move into fiscal surplus by 2014/15 – based on solidifying economic forecasts – helping to cap Government at low levels.
This should keep the rating agencies happy – look out for reaffirmations of NZ’s sovereign rating later today.
It’s worth noting, NZ-US interest differentials haven’t really budged over the past week, despite the much publicised gains in US bond yields.
NZ-US 3-year swap differentials sit around 255bps, where they have been for most of the past two months. This supports our view the NZD/USD sell-off is close to bottoming out.
In the short-term, strong NZD/USD support is eyed in the 0.8160/80 window. Initial resistance is expected to kick in around 0.8300.
Keep an eye out today for Japanese GDP figures (11:50am NZT, 0.7%q/q expected) and the RBA’s FX transactions data (1:30pm) which may be of passing interest to currency markets.
---------------------------------------------------------------------------------------------------------------------
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
------------------------------------------------------------------------------------------------------------------
Majors
The USD remains on the front foot, although last night’s gains more reflect EUR/USD selling than anything else. Indeed, outside of the EUR, the major currencies have mostly tracked sideways.
The run higher in US bond yields screeched to a halt overnight as a swathe of less-than-impressive US activity and inflation data cast doubt on the idea the Fed will soon taper the pace of asset purchases.
This largely explains the failure of the greenback to notch up additional broad-based gains. USD/JPY managed to eke out a fresh high above 102.50, but has since given up most of these gains.
US producer prices for April fell 0.7% (+0.6%y/y), the steepest drop in three years. Meanwhile, industrial production slipped 0.5%, the biggest fall since October, and the May Empire Manufacturing Index disappointed investors by dropped back into negative territory (-1.43 vs. 4.00 expected).
From two month highs around 1.98%, 10-year US Treasury yields pulled back 5bps to 1.93%.
We suspect weak US price pressures and a decidedly patchy US economic picture will prevent US bond yields and the USD racing away to the topside.
We doubt US 10-year yields will be able to break through resistance around 2.1%. This should help keep the USD in check.
Advanced European Q1 GDP figures were disappointing. The contraction in Eurozone GDP (the 6th consecutive one) was slightly larger than expected at -0.2% (vs. -0.1% expected) with a meagre +0.1%q/q increase in German GDP growth particularly worrying (+0.3% expected).
Signs the European, and particularly German, economies continue to struggle have seen the EUR underperform overnight. The EUR/USD skidded from 1.2940 to 1.2860, amid heavy selling of EUR crosses.
Tonight, market attention will remain on the US, with another swathe of second tier data due for release. Any additional disappointment would see the USD reverse a little more of its recent gains.
The fact San Francisco Fed President Williams, a dove, is due to speak perhaps further skews the USD risks to the downside.
Other news:
*The Bank of England’s Quarterly Inflation Report revealed a slightly more optimistic outlook for UK economy. However, there was little lasting impact on UK yields and the GBP.
*The BoJ announces it will pump ¥2.8t into the money market to “address the rapid increase in longer-term interest rates”. This after Japan’s 5-year borrowing costs rose above Germany’s for the first time in 20 years.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.