Opinion: NZ$ hits low of 76.2 Aussie cents after tepid CPI

By Mike Jones After a brief dalliance with the 0.7140 region, NZD/USD slipped back below 0.7100 following yesterday’s CPI numbers. Overall, the NZD has spent the past 24 hours torn between an improving global backdrop on one hand, and evidence of a generally tepid NZ recovery on the other. The March quarter CPI proved fairly tame. The market was looking for a number of around 0.6% (2.3% y/y). Instead, Q1 inflation printed at 0.4%. While fractionally higher than the 0.3%q/q forecast from the RBNZ’s March MPS, it was bang on the Bank’s 2.0% annual forecast, due to rounding issues. As such, yesterday’s inflation figures afford some relief for the Bank, thus providing further excuse to aim its first OCR hike for July, rather than June. Indeed, yesterday’s data was the last straw for interest rate markets, which have now shifted to July as the favoured timing for the RBNZ’s first 25bps hike. Consistent with this, NZ-US 3-year swap spreads dropped to 289bps (from around 295bps on Monday) dragging NZD/USD back below 0.7100 in the process. The combination of the softer NZ CPI and yesterday’s relatively hawkish RBA Board minutes created the perfect storm for NZD/AUD. Anticipation of further falls in NZ-AU interest rate spreads (NZ-AU 3-year swap spreads are already at 15-year lows) spurred strong interest to sell NZD/AUD from both macro and short-term speculative accounts. As a result, NZD/AUD skidded to an overnight low of almost 0.7620. A positive night in global markets helped the NZD consolidate following yesterday’s post CPI-losses. Risk appetite was buoyed by upbeat global data and a positive string of US earnings reports. Global equity markets posted gains of 0.3-1.7%, while commodity prices bounced back following the partial resumption of European flights. For today, direction for the NZD will most likely come from NZD/AUD with a couple of second tier Australian data releases the only data of note. Initial support on NZD/USD is eyed around 0.7080, with resistance towards 0.7150. The major currencies put in a mixed performance last night. While easing fears about the global outlook initially weighed on the USD, a late weakening in the EUR meant the USD finished the night firmer. Global equity markets resumed their uptrend last night after the wobbles at the start of the week. The DAX rose 1.65%, the FTSE gained 1.0% and the S&P500 is currently up around 0.8%. Not only was last night’s data fairly upbeat, but the US corporate earnings season is progressing better than many expected in Q1, underscoring investors’ renewed faith in the US recovery. Goldman Sachs’ Q1 profit results blew analysts’ forecasts out of the water (EPS of US$5.59 vs. US$4.01 expected). However, this was overshadowed somewhat by the allegations of securities fraud against the bank raised last Friday. Stocks and commodities were also buoyed by the partial resumption of flights out of Europe. Oil prices bounced back around 2.5%, while the broader CRB commodity price index rose about 1.0%. The VIX index (a proxy for investors’ risk aversion) fell back to 16% – about where it was before the Goldmans case gave markets the jitters. Reflecting the recovery in risk appetite, investors trimmed positions in “safe-haven” currencies like the JPY and to a lesser extent the USD. Indeed, USD/JPY climbed from 92.40 to almost 93.40. EUR had a volatile night. The German ZEW sentiment survey certainly impressed (53.0 vs. 45.1 expected), as did the latest Greek T-bill auction (bid to cover ratio of 4.61). As a result, EUR/USD initially climbed to almost 1.3520. However, concerns about Greece continue to weigh on EUR. Not only did January data show Greek unemployment surging to 11.3% (from 10.2% in December), but Greek-German 10-year bond spreads blew out to fresh highs of nearly 480bps. The Icelandic ash cloud hasn’t been any help, delaying the meeting between IMF and Greek officials to discuss bailout plans. We remain fairly downbeat on the EUR’s short-term prospects. European growth looks set to be anaemic this year and sovereign solvency issues are likely to linger. A retest of March’s 1.3270 lows looks likely over coming weeks. The CAD was the strongest performing currency last night after the Bank of Canada (BoC) signalled interest rates are set to rise. The BoC left its key policy rate unchanged at 0.25%, but dropped its commitment to keep rates on hold until the end of June. Instead, the BoC cautioned it would soon “begin to lessen the degree of monetary stimulus”, reflecting the improving tone of recent Canadian data. *All of the research produced by the BNZ Capital team of economists is available here