Opinion: Kiwi$ weak after RBNZ suggests it may not have to hike OCR as much as before

By Mike Jones After hitting 5-week week highs on Wednesday, NZD/USD has crashed back to Earth over the past 24 hours. A steady stream of NZD-negative news has knocked NZD/USD back to 0.7000. Yesterday’s RBNZ Statement proved a tad more dovish than market expectations, as we suspected. Growth appears to be turning out much as the RBNZ expected and inflationary pressures look contained. This being so, it was little surprise the Bank maintained its expectation to “begin removing policy stimulus around the middle of 2010”. But markets were more interested in the bank’s assertion higher bank funding costs will “reduce the work that monetary policy might otherwise need to do”. OCR tightening expectations were trimmed back accordingly (2-year swap rates fell around 6bps), knocking some of the wind out of NZD/USD. Speculative and leveraged accounts used the more dovish Statement as an excuse to add to already weighty NZD/AUD short positions. And with NZ-AU 3-year swap spreads sinking to a fresh 15-year low of -89bps, NZD/AUD soon skidded to 0.7650, adding to downward pressure on the NZD. Yesterday’s weaker Australian employment data kicked the currency when it was down. Australian employers added just 400 jobs in February, in contrast to expectations for a 15,000 gain. Not surprisingly, the AUD slipped in the wake of the data, dragging NZD/USD back towards 0.7000. We’re looking for a bounce of about 0.8% in today’s January retail sales data, with an even better bounce-back in ex-auto terms, of 1.3%. The market is not quite so confident, with expectations of 0.5% and 0.7% respectively. In contrast, today’s REINZ data seems set to confirm soft house sales, underscoring the struggling housing market. For today, we suspect a retail sales bounce in excess of 1.5% will be needed for NZD/USD to re-test resistance around 0.7070. Near-term support is eyed on dips towards 0.6960. It has been a bit of wild night in currency markets. Smoothing through the volatility, the USD has generally dribbled lower, but with a mixed performance against the majors. Fears China’s economy is overheating dented investors’ risk appetite yesterday. February’s data ‘dump’ suggested the Chinese economy is showing no signs of slowing. Retail sales soared 22.1%y/y, industrial production rose 12.8%, and new loans amounted to US$700b. But what really caught analysts’ eye was the 2.7%y/y increase in Chinese inflation. This was above the 2.5% expected and worrying close to the Chinese government’s 3% ‘target’. While several distortionary factors seemed to be at work in the data (such as the Chinese New Year), it still looks as if authorities have more work to do in slowing the Chinese economy. While Asian equity markets closed flat to slightly down, commodity prices fell, tempering the rally in growth sensitive currencies like CAD, AUD and NZD. The VIX index (a proxy for risk aversion) rose from 18.5% to 19% and the CRB index (a broad measure of commodity prices) fell 0.5%, to be down 1.3% over the week. Not only did lower risk appetite provide the USD with some ‘safe-haven’ support, but ratings agency S&P said the USD is still the ‘most important’ world currency, albeit with risks from growing US deficits. The Swiss National Bank’s policy announcement caused some brief volatility in currencies. The SNB kept its interest rate target at 0.25%, but said it would act "decisively" to counter further gains in the CHF. EUR/CHF spiked from 1.4600 to 1.4630 in the wake of the announcement, before retracing around half of these gains. As a result, EUR/USD enjoyed some fleeting support. GBP was a clear bright spot last night, for a change. We had suggested markets had gotten overly pessimistic on the UK economy and GBP. As a result, last night’s modestly higher UK inflation expectations data prompted a mild paring of the record GBP short position, sending GBP/USD from around 1.4980 to nearly 1.5050. Gains in GBP, combined with easing fears about the global economic outlook (US trade balance data came in slightly better than expected) saw the USD dribble lower later in the night. Looking back over the past week, the USD has really just drifted lower on a trade-weighted basis. We suspect further modest declines are likely in the short-term, as ‘safe-haven’ support is unwound. What’s more, tonight’s speech from the Fed’s Dudley may well reiterate the need for exceptionally low interest rates for an “extended period”. Near-term support on the USD Index is eyed towards 79.8. * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here