Opinion: NZ$ solid ahead of Reserve Bank outlook on Thursday

By Mike Jones It was another week of chopping trading in the NZD last week. Having spent most of the week drifting lower, NZD/USD found its feet on Friday to end the week more or less where it started. Despite a broad improvement in appetite for ‘risk sensitive’ currencies, NZD/USD spent most of last week hamstrung by the weaker NZD/AUD. Tuesday’s 25bps RBA rate hike, and Wednesday’s robust Australian GDP figures underscored the fact Australia is clearly in better shape than NZ at present. NZ-AU 3-year swap spreads fell below -70bps and NZD/AUD tumbled to near 10-year lows below 0.7650. However, sentiment towards the NZD recovered on Friday night. February’s better-than-expected US non-farm payrolls report (-36,000 vs. -68,000 expected) and easing concerns over Greece’s fiscal crisis spurred optimism about the global outlook, and equity markets finished the week on a firmer note. The MSCI World Equity Index rose 1.3% on Friday, to end the week 3.3% stronger. Our index of risk appetite (which has a scale of 0-100%) rose to nearly 70%, having started the week closer to 60%. Friday’s backdrop of firming risk appetite and strengthening global equities saw investors ditch ‘safe-haven’ currencies like the JPY and USD, in favour of global growth-sensitive currencies like the NZD. NZD/JPY jumped from 61.50 to 63.00, helping drag NZD/USD back towards 0.7000. Strong demand for NZD/USD was noted from both macro and model accounts keen to cover existing short positions. For this week, a packed local event calendar should see the NZD’s focus shift from offshore to local developments. We expect the RBNZ will stay “on message” at Thursday’s Monetary Policy Statement, affirming its mid-year focal point for starting to increase its OCR. While recent local data, and international events, argue for more of a delay, forward-looking indicators, and the May Budget, suggest there will be enough momentum to keep the Bank on its previously stated course. We retain our long-held view of a first hike, in June, of 25bps. However, for the very near term, the risks appear tilted towards a delay toward July, or even September. Market pricing is currently bang in-line with our view of a June start to RBNZ tightening. As such, any dovish undertones from the RBNZ intimating a later start would provide clear headwinds for the NZD. Absent any major surprise from the RBNZ, we’d expect improving confidence about the global backdrop to keep NZD/USD supported on dips towards 0.6850 this week. The USD slipped against most of the major currencies on Friday night. Not only did easing concerns about Greece’s fiscal crisis reduce ‘safe-haven’ demand, but upbeat global data allayed fears about the strength of the global recovery. Any concerns stormy weather would put a dampener on February’s US non-farm payrolls report proved to be false. US employers cut 36,000 jobs in February, much better than the -68,000 expected. As a result, the US unemployment rate held steady, at 9.7% (9.8% expected). Not only were investors encouraged by signs of stabilisation in the US labour market, but January consumer credit surged US$5.0b, defying expectations for a US$4.5b fall. In response, US interest rates rose, anticipating earlier policy tightening from the Fed. US 10-year yields increased 7bps and the implied yield on the December Fed Funds futures contract ticked up 3bps to 0.53%. Adding to the positive mood, January German factory orders easily outstripped analyst forecasts (4.3% vs. 1.3% expected). The upbeat global data reassured investors the global recovery is picking up steam, and encouraged demand for ‘riskier’ assets. The VIX index (a commonly used proxy of risk aversion) fell below 17.5% on Friday, meaning risk appetite has now recovered all of its losses associated with Greece’s difficulties. Both the S&P500 and the German DAX rose 1.4% (to be up 3.1% and 5.0% respectively over the week). While investors’ knee-jerk reaction to payrolls data was to buy the USD, firming appetite for risk eventually won the day. Optimism about the global recovery and gains in equity markets saw safe-haven currencies shunned at the expense of ‘growth-sensitive’ currencies. JPY crosses were in particularly hot demand. USD/JPY soared over 1% to nearly 90.50. The Greek PM’s meeting with German Chancellor Merkel proceeded roughly as expected. Explicit aid for Greece was once again ruled out, but Greece’s extra austerity efforts were duly noted. Greek 5-year CDS fell 10bps (to be around 130bps below February’s peak) and investors further pared short positions in GBP and EUR. Looking ahead, with risk aversion lifting and confidence about the global recovery improving, we suspect further downward pressure on the USD and JPY may be in store this week. While the Greek crisis is by no means over, it does appear we are past the worst. In the short-term, rallies in the USD Index towards 81.30 are likely to attract sellers. While this week’s global data calendar is comparatively light, watch out for more Fed speakers stressing the need for interest rates to remain low for “an extended period.” * Mike Jones is a BNZ Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here