Opinion: NZD drifts higher after Fed announcement

By Mike Jones The NZD has spent the last 24 hours drifting higher. The NZD/USD is currently sitting around 0.7090, having started the week closer to 0.7000. This morning’s statement from the Federal Reserve stuck to the script. The Fed left interest rates unchanged at 0-0.25% and confirmed its asset purchase scheme is slowly winding down. Still, US interest rates and the USD slipped in the wake of the announcement, with the Fed reinforcing the idea it is in no hurry to withdraw current monetary stimulus. EUR/USD spiked above 1.3760 dragging NZD/USD up to 0.7090. Yesterday’s RBA Board minutes were fairly bland. The RBA was relatively non-committal on how quickly it intends to return rates towards the “normal” level it seeks. There was certainly no smoking gun for an April hike. In fact, markets now expect the RBA to hold off until June – around the same time as the RBNZ is expected to begin raising rates. As a result, those looking for further sharp declines in NZD/AUD headed for the door. Leveraged and speculative accounts squared ‘short’ NZD/AUD positions, pitching the cross from below 0.7700 to nearly 0.7740. Along with the stronger NZD/AUD, a firming in risk appetite also underpinned NZD/USD last night. Not only did global data reinforce the more positive 2010 global outlook (UK house prices and German confidence data exceeded expectations), but European finance ministers effectively placed a safety net under Greece. The statement from the Eurogroup meeting suggested agreement has been reached on some form of aid for Greece, should it ever be asked for. For today, the March Westpac consumer confidence survey (due at 10am) is the lone item on the local data calendar. Across the Tasman, Q4 dwelling starts data should be relatively uneventful, but keep an eye out for headlines from RBA Assistant Governor Debelle’s 2pm (NZ time) talk. Overall, we suspect dip in NZD/USD will be limited to 0.7050 in the near-term. This morning’s FOMC statement contained a familiar ‘steady as she goes’ message. The Fed left its policy rate at 0-0.25% and confirmed purchases of agency debt and mortgage backed securities are nearing completion, as expected. While the Fed upgraded its assessment of the US economy slightly, it continues to caution current economic conditions warrant exceptionally low interest rates for “an extended period”. There was certainly no sign of the more hawkish language some had expected. As a result, US interest rates slipped in the wake of the Fed’s announcement, providing a drag for the USD. 2-year US Treasury yields fell around 4bps and EUR/USD briefly spiked up to 1.3780. Prior to the Fed decision, the USD was already on the back foot. Renewed optimism about the global outlook bolstered investors’ risk appetite, spurring broad-based gains in global equity markets and commodity prices. European equities rose 0.5-1.2%, the S&P500 is currently up 0.6% and the CRB index (a broad measure of commodity prices increased about 1%. As a result, the ‘safe-haven’ appeal of the USD (and to a lesser extent the JPY) was rejected in favour of GBP, EUR and CAD. A further paring of short positions in EUR and GBP paved the way for last night’s bout of USD weakness, as fears eased over stagnating growth in Europe. EUR/USD jumped from 1.3680 to around 1.3760, while GBP/USD ground up to 1.5200, having dipped to 1.5000 at one point. The March German ZEW survey was not quite as weak as analysts had feared (44.5 vs. 43.5 expected), while the UK DCLG survey showed house prices running at nearly twice the expected pace in January (6.2%y/y vs. 3.5%). A political poll showing an outright majority for the opposition cooled political uncertainty in the UK. Adding to the positive sentiment, last night’s statement from the Eurogroup finance ministers’ meeting gave Greece another pat on the back for its efforts to slash its deficit. The statement also said ministers had agreed on the "technical modalities” of how aid would be provided to Greece, should it eventually ask for it. Still, Greek 5-year CDS spreads were more or less unchanged at 295bps. Looking ahead, today’s Bank of Japan policy announcement should be more exciting than usual. Not for any change to the BoJ’s policy rate, which will be left at 0.1%. Rather, speculation is rife that the BoJ will increase its asset purchase scheme in an attempt to stave off further deflationary pressures. If the BoJ fails to deliver, expect a bounce in JPY. We suspect the USD index will struggle towards 80.50, reflecting the Fed’s renewed commitment to keep interest rates at low levels for some time to come. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here