Good but not great data sees the NZD sold off; Draghi worried about 'search for yield'

by Kymberley Martin

NZ Dollar

The NZD/USD was the weakest performing currency over the past 24-hours.

It sits at 0.8490 this morning.

Fonterra announced its forecast payout for the 2014/15 season yesterday morning. This came in at $7.00. In addition, this season’s forecast was revised down 25c to $8.40.

However, the NZD/USD initially experienced a brief relief rally, as the outcome was likely not as bad as some had feared. Some had expected next season’s payout would begin with a $6.

Later in the day the May ANZ business survey showed a long overdue moderation. Headline business confidence dropped to +53.5 from +64.8.

However, the readings are still consistent with GDP and CPI rising at an above trend pace. They certainly still suggest the pressure is on for the RBNZ to return the OCR to ‘neutral’ (circa 4.25%) in the first instance.

However, the NZD slipped in response to the survey’s decline in momentum. The NZD/USD then came under further pressure overnight as the USD strengthened. The NZD/USD broke through key support above 0.8500 to trade at 0.8490 currently.

The NZD was also notably weaker on the crosses. The NZD/JPY has slipped to 86.40, its lowest level since mid-March. The NZD/AUD has also declined to the lower end of year to date ranges. It sits at 0.9200 currently with crucial support eyed in the 0.9160-80 window.

With no NZ data scheduled for release today, the cross will take its cue from AU capex data, to be released this afternoon (1.30pm NZT). Meanwhile the fate of the NZD/USD this evening will likely be determined by the release of US Q1 GDP.

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Majors

A stronger USD was once again the key theme overnight. The GBP underperformed along with the NZD, while the JPY was the strongest performer.

In an interesting move overnight, the USD strengthened while US Treasury yields declined. The USD benefitted from weakness in the EUR and the GBP. The EUR was on the back-foot from early in the evening after German unemployment data disappointed. While the unemployment rate remained steady at 6.7%, unemployment change was +24k (-15k expected).

Early this morning the EUR was then assisted on its downward path by comments from ECB President Draghi. He said the ECB sees continued downside risk to the fragile economic recovery in the region. He also commented that the “continued global search for yield” has left the financial system vulnerable to “an abrupt reversal of risk premia”. The EUR/USD slipped from around 1.3630 to 1.3590 currently.

The GBP was dragged lower, also assisted by a disappointing UK CBI retail sale report. This dropped to 16 in May (35 expected). The GBP/USD declined from 1.6810 last evening to 1.6700 currently.

The AUD/USD sits a little lower this morning, just above 0.9220. Today, the key AU data release will be Q1 capital expenditure. Our NAB colleagues expect a further 3% decline in real spending, following a 5.2% decline last quarter. But more important will be the second estimate for 2014/2015 capex. The first estimate was very poor, so the market will be looking for some upward revision, especially in non-mining to help cover the expected plunge in the mining sector. Failure to see any upward revision would likely weigh on the AUD.

Tonight, all eyes will be on the 2nd reading of US Q1 GDP. Consensus already expects downward revision to -0.5%q/q.

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