Opinion: NZ$ buffeted by RBA rate hike, Greek fears and hot Fonterra auction

By Mike Jones It’s been a real rollercoaster ride for the NZD over the past 24 hours. After dipping to a near 4-week low below 0.7000 at one point last night, NZD/USD has since roared back above 0.7050. Yesterday’s Quarterly Survey of Business Opinion was consistent with ongoing economic recovery. But it’s a recovery that’s dragging the chain a bit, if some of the softer undertones from the QSBO are anything to go by. The contrast to the rollicking Australian economy was made all the more obvious by yesterday’s 25bps hike in the RBA’s cash rate, taking it to 4.25%. Short-term speculative accounts took the opportunity to add to ‘short’ NZD/AUD positions, sending the currency to fresh 9½ year lows around 0.7560. Overnight, reports Greece now wants out of the EU-IMF ‘rescue’ package took a sharp toll on EUR, which also provided some headwinds for the NZD. EUR/USD slumped from nearly 1.3500 to below 1.3400. The combination of the weaker EUR/USD and a record low in NZD/AUD briefly dragged NZD/USD below 0.6980 last night. However, the NZD/USD didn’t stay down for long. Further evidence NZ’s commodity export prices are on the improve prompted a rapid recovery in NZD sentiment. Average whole milk powder prices rose a whopping 21% (to US$3,969/tonne) at last night’s Fonterra online auction. This leaves prices up almost 80% from year-ago levels and comes hot on the heels of yesterday’s 1.2% gain in March’s ANZ commodity price index. As a result, NZD/AUD managed to scrape back above 0.7600 and NZD/USD surged back to nearly 0.7060. Last night’s sharp turnaround in the NZD/USD puts the currency firmly back inside the familiar 0.7000-0.7180 range it has been tracking for the best part of a month. While the fragile NZD/AUD can be expected to impart further drag on NZD/USD in the short-term, dips below 0.7000 are expected to be short-lived while NZ’s economy and commodity prices continue to recover. The USD strengthened against most of the major currencies overnight. However, ‘commodity-linked’ currencies like CAD and AUD bucked the firmer USD trend. The first part of the night was all about the weaker EUR. Media reports circulated yesterday suggesting Greece wants to amend the joint EU-IMF aid package, fearing IMF conditions would take a heavy toll on the Greek economy. The Greek PM later attempted to deny the claims but it was not to enough to prevent the 10-year Greek-German government bond spread blowing out to above 400bps – an all time high. The EUR was punished accordingly. EUR/USD plunged from around 1.3500 to below 1.3380, EUR/JPY fell 1.5% to 125.50, and EUR/GBP dipped below 0.8780. While weakness in EUR dragged most of the major currencies lower early in the night, the effects were mostly fleeting. GBP/USD managed to grind back above 1.5250, having fallen below 1.5150. Not only did weekend political polls suggest the Conservatives may have enough seats to govern alone, but the UK PMI construction index came out a tad better than expected (53.1 vs. 48.7 expected). Prime Minister Gordon Brown also ended weeks of speculation confirming the UK election will take place on May 6. Yesterday’s 25bps interest rate hike from the RBA ensured higher yielding ‘growth-sensitive’ currencies remained in favour, despite broad USD strength. AUD/USD jumped to near 3-month highs above 0.9250, dragging the CAD and NZD along for the ride. In fact, the CAD reached parity with the USD last night for the first time since July 2008. The March FOMC minutes tended to disappoint those looking for an early policy tightening from the Fed. Despite the recent improvement in the tone of US data, the Fed clearly remains concerned about the fragility of the US labour and housing markets, and the associated risks to consumer spending. As such, the Fed remains comfortable US interest rates can be kept low for an “extended period”. Looking ahead, there is plenty of event risk to watch out for, despite the holiday-shortened week. Central banks will remain in focus with policy announcements from the Bank of Japan, Bank of England, and the ECB still to come this week. All are expected to keep policy rates unchanged. In addition, a host of Fed speakers will hopefully shed more light on what the recent improvement in the US economy means for Fed policy. A weekend Wall St Journal article alluded to a growing divide amongst Fed officials’ view of the US inflation outlook. Should Fed officials continue to douse market expectations for early US rate hikes (the first is expected by November), we’d expect the USD to give back some of its recent gains. Initial support on the USD index is seen towards 80.70. *All of the research produced by the BNZ Capital team of economists is available here