Opinion: NZ$ drifts lower vs US$ ahead of GDP data; may drop below 70 USc

By Mike Jones The NZD/USD has dribbled lower over the past 24 hours, from around 0.7060 to nearly 0.7020. The NZD began to lose ground following yesterday’s less impressive current account figures. December quarter balance of payments data showed NZ’s year-to-December current account deficit falling to ‘just’ 2.9% of GDP (from 3.2%), instead of the expected 2.0%. The knee-jerk reaction to the data saw NZD/USD slip from 0.7070 to around 0.7050. Still, the data provided no immediate cause to downgrade our expectations for today’s Q4 GDP. Overnight, the NZD continued to grind lower. The USD surged on the back of sharply higher US interest rates (10-year Treasury yields rocketed 11bps higher), which pressured most currencies lower. EUR tended to bear most of the brunt of the stronger USD. Ratings agency Fitch downgraded Portugal’s rating (to AA- from AA), highlighting the risk of contagion from Greece’s fiscal woes. As a result, EUR/USD slipped nearly 2 cents to fresh 10-month lows around 1.3350. Despite the carnage elsewhere, the NZD/USD held up fairly well last night. Today’s GDP data is likely to confirm NZ economic activity is gradually picking up and, consistent with this, sovereign and macro accounts continue to show solid appetite for NZD/USD on dips. Reflecting the NZD’s outperformance, NZD/AUD scraped back above 0.7700 last night and NZD/EUR reached a fresh 2-year high of nearly 0.5270. For today, December quarter GDP (released at 10:45am) is front and centre for markets and the NZD. The market’s median expectation is for a 0.8% expansion (0.4% y/y), within a relatively tight range, while the RBNZ had 0.6% in its March MPS. We are looking for a 0.8% advance. Anything shy of this could see NZD/USD test support towards 0.6980. The USD soared last night, benefiting from increased yield support and the free falling EUR. The USD index reached a fresh 10-month high above 81.50. USD strength was most pronounced against the EUR. Indeed, EUR/USD collapsed 1½ cents to 1.3350 last night – the lowest since May 2009. This was despite some pretty solid European data. The German IFO increased to 98.1 in March (95.8 expected) and the European manufacturing PMI index ticked up to 56.3 (54.0 expected). Ratings agency Fitch downgraded Portugal’s sovereign rating to AA-, from AA, and warned further “budgetary underperformance” could result in another downgrade. This highlights investor fears that, even if a support package for Greece is agreed upon, the risk of contagion to other European nations is growing. Heightened sovereign solvency concerns weighed on equity markets (global equity indices are flat to slightly down) and the VIX index (an indicator of global risk aversion) jumped from below 16.5% to 17.50%. Still, rather than ‘safe-haven’ demand, last night’s USD strength was mostly about EUR weakness and increased yield support. Indeed, USD/JPY jumped nearly 2% from 90.50 to 92.50. US 10-year Treasury yields surged 11bps to 3.82%, while 2-year yields rose around 9bps to 1.09%. As a result, US-EU 2-year bond spreads moved into positive territory for the first time since October 2007. A whopping US$118b of government bonds have been offered this week, and surging supply is beginning to outstrip demand. Reflecting this, last night’s 5-year bond auction saw the bid-cover ratio drop to 2.55 (previously 2.75). Last night’s US data was a bit mixed. February durable goods orders (ex-transport) rose 0.9% (compared to the 0.6% forecast), while February new home sales undershot expectations slightly (-2.2% vs. 1.9% forecast). With the GBP already under the pump from the firmer USD, the release of the UK budget statement did nothing to prop up the ailing GBP. GBP/USD slid from 1.5050 to below 1.4900. The report’s forecast halving in the UK’s deficit to £89b by 2014 (from £167b) predicated on 3.5% growth in 2011 was greeted with a fair amount of scepticism by analysts. Looking ahead, UK retail sales look set to be the highlight of tonight’s data schedule. Still, data developments seem to be taking something of a backseat for currencies at present. Instead, markets will continue to take their cues from the Greek debt crisis. Downward pressure on EUR/USD is likely to remain while wrangling amongst European leaders continues. Initial support is eyed towards 1.3300 and then 1.3250. *All of the research produced by the BNZ Capital team of economists is available here