By Mike Jones
The NZD/USD has spent the past 24 hours trading choppily in a 0.7350-0.7420 range.
Perhaps it was the Christmas party season beginning to take its toll, or maybe folk were more interested in watching Australia’s demise in the Ashes, but, whatever the reason, there was very little action in currency markets overnight. Despite the support from a slightly softer USD, the NZD/USD spent the night drifting lower.
Yesterday’s small falls in business and consumer confidence continued the recent run of downbeat NZ economic news, ensuring the NZD underperformed relative to most of the major currencies. Indeed, NZD/AUD fell to a fresh 10-year low below 0.7450.
Looking ahead, we continue to favour the downside in NZD/USD in the near-term, reflecting eroding support from falling NZ-US interest rate differentials.
Indeed, the daily close below 0.7400 yesterday suggests the NZD/USD is in the midst of a new downtrend. We wouldn’t be surprised to see a push towards 0.7250 in coming sessions. Still, the big picture is still one where we expect the NZD/USD to hold up for longer through 2011 (see our NZD Roadmap for 2011 to be released later today).
First, robust growth in the global economy is expected to keep investors’ risk appetite and NZ commodity prices on a solid footing, supporting demand for “growth-sensitive” currencies like the NZD/USD. Second, we expect the NZ economy to record above-trend growth next year. Forecast growth of 5%y/y through 2011 should comfortably exceed that of most of our trading partners, and prompt a series of interest rate hikes from the RBNZ.
Such an outcome would see NZ-US interest rate differentials widen, bolstering the appeal of the NZD/USD for yield-hungry investors. For today, there is nothing on the local data calendar. As such, we suspect the familiar 0.7350-0.7420 range should contain NZD/USD movements on the day.
Majors
Currency markets barely stirred overnight. The beginning of a two day EU leaders’ summit meant investors were generally content to stay on the sidelines. The USD index shuffled sideways in a tight 80.00-80.40 range. Through the early part of the night the USD drifted lower, led by a firmer GBP and EUR. There was relatively little reaction to the much anticipated Spanish bond auction. Spain successfully sold €2.4b worth of 10- and 15-year bonds, but at yields some 80-150bps above its November auction.
EUR sentiment was bolstered by upbeat economic data. Ireland reported positive GDP growth (0.5%q/q in Q3 after -1.2% in Q2) while the PMI indices confirmed the European manufacturing sector remains in good heart overall (56.8 vs. 55.2 expected). From around 1.3200, EUR/USD climbed to almost 1.3260. In a similar vein, UK retail sales outstripped analyst forecasts in November (1.1%y/y vs. 0.7% expected) helping GBP/USD climb from 1.5560 to around 1.5620.
Still, dovish comments from Bank of England MPC member Posen limited the extent of the GBP’s rise. Posen said policy makers should not “overreact to above target inflation.” However, the USD didn’t stay down for long. Later in the night, further evidence of strengthening US economic momentum sent US bond yields and the USD higher. As a result, most of the major currencies finished the night not far from where they started.
US housing starts and building permits figures for November were fairly underwhelming, indicative of a still struggling US housing market. But the Philadelphia Fed index confirmed manufacturing is still the obvious bright spot in the US economy. It rose from 22.5 to 24.3 in December (15.0 expected) – the highest level since 2005. The Swiss National Bank kept its policy target rate unchanged at 0.25% overnight, as widely expected.
Inflation forecasts for 2012 were revised lower but the SNB’s overall policy assessment was broadly consistent with the tone struck in September. As a result, the CHF largely shrugged off the announcement, tracking a broadly sideways 0.9640-0.9730 range.
Looking ahead, investors are on the lookout for any announcement from the EU leaders’ summit of fresh measures to tackle the sovereign debt crisis. The December reading of the German IFO will also be watched tonight. Support on the USD index is seen towards 79.70 with resistance at 80.40.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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