'Growth sensitive' currencies such as Kiwi and Aussie dollar gain as risk appetite index hits 70% for first time since February

By Mike Jones

The NZD has been the strongest performing G10 currency over the past 24 hours, for the second day running.

Global growth sensitive currencies outperformed overnight as global investors continued to rediscover their appetite for risk. Bolstering markets’ rose-tinted view of the global economy, US labour market data impressed and there was no further deterioration in the Japanese nuclear crisis or evidence of wider contagion from Portugal’s recent debt woes.

Global equity markets revelled in the upbeat sentiment and our risk appetite index (which has a scale of 0-100%) hit 70% for the first time since late February. The generally buoyant global backdrop encouraged investors to trim positions in “safe-haven” currencies like the JPY and USD in favour of higher yielding “growth sensitive” currencies like the AUD and NZD. NZD/JPY climbed from 62.40 to above 63.00, helping drag the NZD/USD from 0.7560 to a one month high above 0.7620. Heavy NZD demand from model and momentum type players also underpinned the currency overnight.

We have noted recent NZD/USD strength looks inconsistent with ‘fundamentals’, but positive momentum may yet prompt a test of 0.7720. Indeed, our momentum model entered a fresh NZD/USD long position on the break above 0.7555. Today’s NBBZ survey will be the highlight of the NZ data week (released at 3pm).

While its headline business confidence measure might well go negative following the earthquake, the real test will be in firms’ own-activity indicators. So long as these don’t fall too much, they will still infer decent growth for the economy as a whole. Australian data will also garner some attention with February retail sales and building approvals both due at 1:30pm (NZT).

Nonetheless, the global backdrop remains the key driver of the NZD at present. For today, we suspect upbeat risk sentiment will ensure NZD/USD dips are limited to 0.7580.

Near-term resistance is eyed towards 0.7660.

Majors

After a relatively choppy night, the USD has finished up weaker relative to most of the major currencies. Good cheer continued to spread through financial markets overnight as solid global data and the absence of further bad news about Japan’s nuclear crisis buoyed global growth sentiment. Indicative of such, European equity indices posted gains of 0.3-1.8% and the S&P500 is currently up around 0.9%. The VIX index (a proxy for risk aversion based on implied volatility of the S&P500) slipped from above 18% to 17.5%.

Helping to bolster sentiment on Wall St, the US ADP employment survey showed 201k jobs were added in March. While this was a shade below expectations of 208k, it was still taken as a sign of further improvement in US labour market conditions. Against a backdrop of renewed confidence in the global economy and fading risk aversion, investors ditched “safehaven” currencies like the USD, JPY, and CHF in favour of “growth-sensitive” currencies like the AUD, NZD and CAD. Widening interest rate differentials further weighed on the JPY overnight, with recent hawkish rhetoric from the ECB and Federal Reserve providing an obvious contrast to the easing bias of the Bank of Japan.

Indeed, Dallas Fed President Fisher (regarded as a hawk) said yesterday he would vote against further Fed easing. US-JP 2-year bond spreads have jumped 25bps to 60bps over the past 1½ weeks. From around 82.50, USD/JPY climbed to nearly 83.20 overnight while EUR/JPY surged to a 10-month high above 117.00. Reflecting the softer USD, both EUR and GBP managed to eek out further gains overnight.

In addition, the UK index of services index rebounded 1.3% in January – it’s fastest monthly pace since July 2002 – supporting investors’ expectation the Bank of England could raise rates as early as May. From below 1.6000, GBP/USD ground up to above 1.6060, helping drag EUR/USD from 1.4060 to 1.4140.

Along with the JPY, the CHF was one of the weakest performing currencies of the night. Not only did a reduction in “safe-haven” demand dent the appeal of the CHF, but a Swiss National Bank official said recent CHF gains “limits our room for manoeuvre in normalising interest rates”. Tonight’s jobless claims figures will provide the next update on the strength of the US labour market, ahead of Friday’s all-important non-farm payrolls report.

For today, we suspect the backdrop of buoyant risk appetite and upbeat equity market sentiment will keep “safe-haven” currencies like the JPY and USD heavy.

Mike Jones is part of the BNZ research team. 

All its research is available here.