NZDUSD changed little yesterday while local rates declined, a follow on from Friday's offshore session; GBP recovered some of its Friday losses; JPY changed little, despite much worse than expected January trade balance

By Doug Steel

It was supposed to be a quiet start to the week, given the US Presidents’ Day holiday. And it was. Major currency pairs are all within recent ranges – with many charts competing with each other for the best imitation of a straight line. The DXY is little changed at around 100.80.

The GBP was the exception with a mild push higher, retracing some of its Friday losses. From around 1.2425 this time yesterday, GBP/USD pushed as high as 1.2480 overnight before settling back to around 1.2460 currently. It was enough to go from toward the bottom of the currency leader board at the end of last week to the top today. There was better UK data including stronger than expected CBI industrial orders that pushed up to their highest level in two years, although the GBP had moved higher prior to that. Perhaps it was some short covering as the House of Lords begins its two day Brexit debate over Article 50. The bounce in GBP, saw NZD/GBP fall 0.3% overnight to sit around 0.5770 this morning.

European equity markets were generally little changed, with the Euro Stoxx 50 up marginally (+0.1%). The German DAX was the outperformer up 0.6% on the day.

Oil prices, in thin trading, have pushed up to their highest level in a week on optimism over the effectiveness of producer cuts. Brent crude rose 0.6% to around US$56.20/bbl, edging towards the top of the US$53.50 to US$57.50 range that has largely contained it this year. Higher oil prices are very much part of the lift in inflation across many counties over recent months (aided by declines a year ago dropping out of annual calculations).

German producer prices overnight were the latest to reflect this dynamic, with prices up 2.4% y/y in January, higher than the 2.0% anticipated by the market. But nothing to significantly jolt the EUR with EUR/USD currently sitting at about the same place as 24 hours ago at 1.0620. NZD/EUR opens this morning around 0.6770.

Likewise, data was largely ignored in yesterday’s local session. NZ’s PSI pointed to very robust growth in the service sector, while producer price and capital goods price data reinforced the message of inflation turning higher on commodities as well as construction pressure. Annual NZ producer output price inflation rose to 2.5% in Q4 from 0.1% in Q3. Ignored. The NZD traded a very tight range of circa 20 pips overnight.

NZD/USD opens this morning around 0.7185. We don’t expect any significant market moves following from Finance Minister Joyce’s talk at noon. Another quiet day looks in prospect, ahead of what looks like being a weaker dairy auction early tomorrow morning. We still respect last week’s high of 0.7240 on the top side and last week’s lows around 0.7140 on the downside. Note the 50-day, 100-day and 200-day moving averages are converging on 0.7110-0.7130 so that is a strong area of technical support.

JPY stuck with the ‘ignore the data’ theme of yesterday, at least initially, brushing off a much worse-than-expected January trade balance as exports significantly undershot expectations and imports significantly outpaced priors. USDJPY rose marginally overnight, to sit around 113.10 this morning.

There were minimal moves in core European bond yields overnight. Interest rate markets continue to await Trump’s ‘phenomenal’ tax policy which probably won’t be this week but maybe next.

Meanwhile, after all the Fed speakers over the past week or so, a hike in March remains an open question. The US Fed Minutes (due early Thursday morning NZT) will be the next one to watch on this to glean any further information on whether a March rate hike is probable (currently 30% to 40% priced, depending on how you measure it), and whether the Fed is still looking to hike rates three times this year. The market currently prices a touch over two 25 bp rate hikes in 2017.

NZ bond and swap yields declined yesterday, taking their lead from last Friday’s offshore session. Despite the upbeat local data, NZ 2 year swap yields closed down 4 bps, at 2.325%, as the market questions its conviction on whether the RBNZ will hike this year. The market now prices the chance of a hike by November at around 50/50, compared to that meeting being fully priced a few weeks ago prior to the RBNZ statement.

Little new news is expected out of the RBA minutes this afternoon. While PMI indicators for Germany, the Eurozone, and the US are expected to maintain the recent upbeat vibe around growth supporting risk appetite.

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