New bout of risk aversion needed to rein in kiwi dollar as it outperforms Aussie dollar

By Kymberly Martin

The NZD ended a strong week with solid performance on Friday, rising from around 0.7620 to 0.7680, in the backdrop of buoyant risk appetite and rising commodity prices.

The NZD was one of the strongest performers, last week, rising 1.9% versus the USD as risk appetite returned to markets globally, equity markets made strong positive returns and commodity prices rose, with the CRB index rising to 361, close to its early March high.

While the AUD was also a beneficiary of these factors, over the week the NZD outperformed its trans-Tasman peer, climbing to 0.7390, and appears to have now formed a solid base off its early March lows. Over the past few weeks the NZ-AU 3 year swap spread has narrowed from close to -155bp to around -149bp, helping to ease some of the pressure on the NZD/AUD from the previously widening interest rate differential.

The performance of the NZD/JPY last week was a clear illustration of improved risk appetite as the NZD gained around 5% on the JPY, with continued strength on Friday seeing the NZD/JPY end the week around 64.50. The NZD also gained on its European peers last week with solid performance on Friday evening, with the NZD/EUR rising from around 0.5380 to 0.5400. The NZD/GBP finished the week around 0.4760 completing a very sharp rebound from mid March lows below 0.4450.

This Thursday, both the Bank of England and the ECB will review interest rates. Consensus expects the BoE to keep rates at 0.5% and the ECB to raise rates 25bp to 1.25%. We continue to point out that NZD/USD strength looks inconsistent with fundamentals, and our short-term valuation model suggests a “fair-value” range of 0.7100-0.7300. However, with global risk appetite currently surging the NZD is a key beneficiary, and it will likely take another bout of risk aversion for markets to refocus on “fundamentals” and assert some downward pressure on the NZD/USD.

This week look out for NZ Crown Financial Accounts today, and the QSBO business survey tomorrow.

Majors

A week marked by generally robust risk appetite ended with strong performance on Friday from “commodity linked” currencies, NZD, CAD and AUD, with weak performance from “safe haven” currencies CHF, JPY and USD. However, risk appetite was not the only factor driving the USD on Friday evening. It was also whipped around by a slew of data releases.

Initially the USD index rose sharply (from 76.10 to 76.60) after March non-farm payrolls surprised to the upside at 216K (190K expected) and unemployment fell to 8.8% (8.9% expected). Just hours later the USD index plunged to around 75.80 after data showed construction spending fell 1.4% in February (-0.2% expected) and the ISM prices paid index rose to 85.0 (82.9 expected).

The ISM manufacturing index itself came in close to expectation at 61.2. However, the market appears to have taken fright from continued weakness in the construction sector. In this backdrop, the EUR and GBP plunged and spiked as a mirror image of moves by the USD. The EUR ended the night around 1.4240, as European specific data failed to cause ripples, with the Eurozone PMI and unemployment rate both coming in line with expectation (unemployment held steady at 9.9%). The GBP ended the night around 1.6120. The “safe haven” CHF and JPY were the weakest performers as they were over the entire week, in the backdrop of improving risk appetite.

An absence of negative new developments in the Japan, Middle East or European debt crises (Portugal managed to issue debt on Friday in higher amounts and at lower interest than analysts had forecast) resulted in generally solid risk appetite. The VIX index (a proxy for risk aversion) stayed around 17% and equities ended a strong week with 1.8% returns from the Euro Stoxx 50 on Friday and 0.5% from the S&P500. Oil and commodity prices also continued their ascent with the WTI crude oil price closing around US$108.

Not surprisingly in this backdrop the NZD, CAD and AUD were amongst the strongest performers on Friday night and over last week as a whole. The AUD ended the week around 1.040, its highest level since June 1982.

Key developments this week will be central bank rates announcements with the RBA policy announcement on Tuesday along with the March Fed minutes and the Bank of England and ECB on Thursday. The ECB is now widely expected to raise rates from 1% to 1.25%. Confirmation should provide near term support to the EUR.

Kymberly Martin is part of the BNZ research team. 

All its research is available here.