News and views
The New Zealand dollar continued to surge higher on Friday night, coming close to the lifetime high of 0.8110 set in July last year. Model-based traders were noted sellers of the US dollar against a range of currencies, but the NZD was particularly favoured. Talk of uridashi-related buying also supported the currency – there is an issue of unknown size in the pipeline, though it corresponds to a $760m maturity, which suggests that it may not lead to net NZD buying. A strong bounce in US equities late in the day, after CNBC reported that a bank rescue plan for bond insurer Ambac could be announced within days, pushed the NZD on towards 0.8100.
The Australian dollar was also in demand, briefly reaching a fresh three-month high of 0.9250. However, the ongoing demand for NZD saw stop-loss buying triggered in the cross, frustrating those traders that have been looking for the exchange rate to match the sharp move in yield spreads in the AUD’s favour. The market has stopped short of fully pricing in a rate hike at the RBA’s March review, despite strong warnings in recent weeks that further tightening will be required. This suggests that the AUD could still squeeze out further gains on a yield basis.
The euro benefited from a bounce in the Euroland composite PMI from 51.8 to 52.7 in February. The advance report showed slippage in the factory PMI but a stronger services reading. The PMI is a good leading indicator of GDP growth and this outcome suggests the Q1 Euroland GDP growth should not be too much weaker than Q4’s 0.4%. In contrast, Euroland industrial orders fall 3.6% in December, which is a less solid signal for GDP growth. Also, French consumer spending was down 1.2% in January, a soft start to the year after solid spending growth at the end of last year.
The Canadian dollar failed to catch the trend of broad US dollar weakness. Retail sales fell short of forecasts with a 0.6% gain in December. Auto sales and higher gasoline prices boosted the retail headline but excluding those factors sales were down 0.7%. The November retail strength appears to have borrowed from December.
Dallas Fed governor Fisher said that some problems in credit markets could take years to work out, but also noted that there is a question over whether inflation expectations are well anchored. Inflation premiums, as measured by inflation-indexed bonds, have widened recently, and annual inflation is running at a very high level. Fisher is considered one of the more hawkish Fed governors.
Outlook
On previous occasions when the New Zealand dollar has reached record highs, it has punched through the previous high with little resistance and ended its run a few cents higher. Admittedly this is a sample of two (March 2005 and June 2007), so we’d be careful about extrapolating from this; but at face value the previous high of 0.8110 doesn’t appear to present strong resistance. We’d also note that the NZD is not at extreme levels on a relative basis – on a trade-weighted basis it is still 4.5% below its all-time high, as much of the recent strength has been via a weaker US dollar. In fact, the NZD is one of the few major currencies that has not set a new high since the credit crunch began last year (the other exception is the pound, which has been hurt by UK-specific issues).
After taking its lead from the Australian dollar and the RBA’s hawkish signals last week, there is a bit more local data to guide the NZD this week. Building consents, credit growth, migration, and business confidence will probably be on the soft side. However, the RBNZ’s inflation expectations survey (Tuesday) is potentially more significant and is likely to provide much comfort for the central bank.
