By Mike Jones
The relentless ascent of the NZD/USD continued overnight. In fact, the NZD/USD has been the strongest performing G10 currency over the past 24 hours, surging from below 0.7700 to 2-month highs above 0.7800.
‘Growth-sensitive’ currencies outperformed overnight, as strong risk appetite and renewed optimism about the global economy buoyed ‘carry trade’ demand (borrowing in low-yielding ‘safe-haven’ currencies like the JPY to invest in higher yielding currencies like the AUD and NZD).
Global equities posted modest gains and our risk appetite index (which has a scale of 0-100%) rose from 71.4% to 72.1%. Broad-based JPY selling lifted the NZD/JPY from 65.20 to 11-month highs above 66.40 which, along with solid buying from momentum accounts, helped propel the NZD/USD above 0.7800 for the first time since early February.
Gains in global commodity prices have also underpinned the NZD over the past 24 hours. Sure, milk prices eased a further 2.4% at yesterday’s Fonterra auction. But, for now, the NZD seems to be taking its cues more from surging prices for global commodities like oil and metals (we’ve found the NZD/USD actually bears a closer correlation to industrial metals prices than prices for NZ’s commodity exports).
Overnight, oil prices leapt to a 2½ high a smidge below US$109/barrel, an index of industrial metals prices increased 1.6%, and gold prices ground up to a new all-time high around US$1460/ounce. It’s worth noting, the recent strengthening in the NZD/USD has not been accompanied by gains in NZ-US interest rate differentials, increasing the risk of a sharp reversal in the currency’s fortunes.
NZ-US 3-year swap differentials fell to a fresh 22-month low of 221bps overnight. Looking ahead, a test of February’s 0.7830 high in the NZD/USD cannot be ruled out for coming sessions. Dips should be limited to 0.7740 for today. Keep an eye out for Australian employment figures due at 1:30pm (NZT).
Majors
The USD and JPY weakened broadly overnight as investors’ buoyant risk appetite sapped demand for “safe-haven” assets. Higher yielding currencies were the strongest performers. Over the past few weeks, renewed confidence in the strength of the global economy has provided a boost to investors’ risk appetite, encouraging ‘carry trade’ demand. Similar themes prevailed overnight.
Global stock and commodity markets strengthened, indicative of improved sentiment towards the global economy. European equity indices increased 0.2-1.6%, and the S&P500 is currently up around 0.3%.
Meantime, oil prices surged to nearly US$109/barrel – the highest since September 2008 – as worries about oil production in Nigeria and Gabon inflamed supply concerns. The generally buoyant global backdrop saw “safe-haven” currencies like the USD and JPY shunned in favour of higher yielding alternatives like the NZD, AUD and EUR. USD/JPY leapt to a 7-month high of almost 85.50 as the JPY continues to assume more of the burden as the global funding currency of choice.
USD sentiment was dealt a further blow by Fed rhetoric suggesting rate rises are still some way off. Atlanta Fed President Lockhart said "I just don't think it is yet the right time to reverse course (in regards to easy monetary policy)". The EUR led the gains against the broadly weaker USD. Not only did Portugal successfully issue €1b worth of short-term funding, easing debt concerns, but German factory orders provided further evidence of strong momentum in the German economy (rising 2.4%m/m in February vs. 0.5% expected).
From around 1.4220, EUR/USD climbed to a fresh 15-month high above 1.4330. In contrast, the GBP surrendered its early gains after February industrial production data (-1.2%m/m vs. +0.4% expected) cast doubts on the strength of UK economic activity in Q1. The knee-jerk reaction saw GBP/USD lose over ½ cent to 1.6270, before broad USD weakness lifted the currency back above 1.6320.
Looking ahead, all eyes are on tonight’s ECB policy announcement (the Bank of England decision should be comparatively uneventful).
All and sundry expect the ECB to lift its key policy rate 25bps to 1.25%. Given this, the focus for markets will be whether or not President Trichet chooses to endorse market pricing of four additional rate hikes over the coming 12 months. We’d suggest there is some risk of disappointment on this front. Near-term support on the EUR/USD is eyed towards 1.4245.
Mike Jones is part of the BNZ research team.
All its research is available here.
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