By Danica Hampton
After climbing to nearly 0.5750 yesterday afternoon, the NZD/USD slipped lower last night as the recovery in global equities paused for a bit a breather.
After chalking up the strongest daily gain in about five months, profit-taking saw US equities fall modestly last night. As a result, we've seen growth sensitive currencies like NZD also tend to head south. However, GBP bucked the trend. GBP/USD surged to a five week high of above 1.4750 after unexpectedly strong UK CPI (it rose to 3.2%y/y vs. 2.6% forecast) and Bank of England Governor King said there was no reason to see further dramatic declines in GBP.
The focus for the NZD is starting to switch back on to NZ events. Today's Westpac Consumer Sentiment index will provide an indication of how NZ households felt in Q1. And Thursday's current account data will be avidly watched after Finance Minister Bill English warned about NZ's "challenge of chronic twin deficits" yesterday.
While NZ's large external imbalances are clearly a risk for the NZD, we're fairly convinced the current account deficit is past its peak. Friday's GDP release will likely confirm the NZ economy contracted 1.1% in Q4 2008. While not good news in itself, this stacks up favourably to the 1.6% drop seen in the US, and 1.5% decline seen in the UK and Eurozone and the 3.2% drop seen in Japan.
The recent recovery in NZD/USD is starting to look a bit excessive relative to indicators like NZ-US interest rates spreads. Indeed, with technical indicators like the daily RSI suggest the NZD/USD is "overbought" we suspect further dramatic gains will be hard work.
For today, with little direction coming from the global backdrop, we suspect NZD/USD will struggle to break above 0.5750. On the downside, initial support is seen around the 0.5550 region.
The USD firmed a little against most major currencies last night as markets tried to weigh up the countervailing forces at play.
Fears the Fed's quantitative easing will weigh on the USD still linger, but at the same time it is hoped the dramatic policy measures will help stimulate US growth. Meantime, investors are unsure whether or not to believe the glimmers of hope on the horizon, uncertain whether or not the worst of the financial crisis and global recession is behind us. The net result has left currencies a little directionless.
US equities markets fell modestly last night, largely on profit-taking after chalking up the largest daily gain in about five months. Both Bernanke and Geithner testified before the Financial Services Committee and Obama's administration is still facing criticism for its handling of bonus payments at AIG (who received US$170b in bailout money). The S&P500 is currently down 0.4% (although it's up about 23% from the lows seen March 6).
Last night's economic news tended to surprise on the upside. In the US, house prices rose 1.7%m/m in January and the Richmond Fed manufacturing index rose to -20 in March, well above the -51 forecast. In the Eurozone, the services PMI rose to 40.1 in March (vs. 39.1 forecast) and manufacturing PMI rose to 37.6 (vs. 36.2 forecast).
GBP/USD eked out further gains, rising from around 1.4600 to above 1.4750, thanks to surprisingly strong UK inflation data. Annual CPI rose to 3.2% in February, well above the 2.6% forecast. The above 3% CPI out turn forced Bank of England Governor King to write an explanation letter to the UK Chancellor of the Exchequer, in which the Bank of England blamed the spike in inflation on the falling GBP. King added that there was no reason for further dramatic declines in GBP.
EUR/USD slipped from above 1.3650 to below 1.3500, pressured by steady selling of EUR/GBP and rumours of selling from quasi-sovereign accounts. Recent comments from ECB council members have suggested Eurozone interest rates will fall further in coming months and that the ECB is getting closer to implementing unconventional measures to stimulate growth. The ECB's Sramko said last night "there is a debate running about how to use other available non-standard instruments" and he expects a relatively fast decision.
* Danica Hampton is BNZ's Currency Strategist. All of the research produced by the BNZ Markets team of economists is available here.
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