The New Zealand dollar was probably the least exciting thing in financial markets on Friday night
April 21, 2008The New Zealand dollar was probably the least exciting thing in financial markets on Friday night, mired within its recent ranges in the midst of some wild swings elsewhere. The NZD was dragged down from 0.7920 to 0.7860 as most of the majors lost ground against the US dollar, before returning to around 0.7900 by the end of the day. The Australian dollar was more susceptible to the offshore moves, falling from 0.9390 to 0.9280 before recovering some ground to 0.9330. The cross rate has run into some take-profit buying as it has approached 0.8330 (or 1.20 in inverse terms), lifting it back to 0.8450 by this morning.
The US dollar benefited from an emerging view that the worst of the US crisis is over. An earnings report from Citigroup was not as bad as feared – $12bn of writedowns, against rumours of as much as $22bn – which saw US equities end the day almost 2% higher. Better than expected earnings from Google and Caterpillar added to the positive sentiment.
Philly Fed president Plosser said that he felt the Fed had cut rates enough to help restore economic growth, and that monetary policy should be kept separate from financial stability. His comments had a similar theme to recent speeches from his colleagues Fisher and Yellen, who sounded warnings about rates being too low for too long. Combined with the G7 statement, which signalled a swathe of new stability measures in coming months, this suggests that from here the Fed will use tools other than their key policy rate to calm markets. Interest rate markets are now pricing a single 25bp rate cut at the 30 April meeting to end the easing cycle.
The euro was hit hard, with the market positioned for a break above 1.60 and wrongfooted by the USD’s gains. European names were noted as heavy sellers, taking the euro from 1.5950 to as low as 1.5720. The yen and the Swiss franc, the traditional ‘funding’ currencies for carry trades, also fell sharply as the bounce in US equity markets encouraged a move back into higher-yield currencies.
The pound was the odd one out, holding its ground against the USD and making strong gains against the euro. The Bank of England is expected this week to reveal a plan that will allow banks to swap mortgage assets for government bonds, effectively making it easier to fund their balance sheets.
UK public finances are in OK shape for now. March budget figures revealed full FY borrowing of £35.6bn, just below the forecast of £36.4bn for the year. But in the FY just begun, the numbers will deteriorate substantially, as the Northern Rock nationalisation and the proposed Bank of England action to ease credit market conditions boost public debt.
The Canadian leading index was flat in March. The components with the biggest drag on the index are equities and the US economy. Wholesale sales fell 1.8% in Feb, mainly on the back of weaker car sales. However, the CAD largely held its ground against the USD.
The relative economic picture argue that the New Zealand dollar should continue to underperform – the economy is now set for a sharp slowdown this year, owing at least as much to domestic factors as to the turmoil offshore, which is likely to be confirmed by the data over coming months. A substantial move lower against the US dollar is unlikely while the USD struggles to get any traction though. On balance the NZD still looks to be biased lower, but easing into short positions may prove to be the safer approach. Selling against other currencies such as EUR or CAD may prove more rewarding.
Thursday’s OCR review is the highlight of the week. While we won’t get a full set of forecasts this time around, Governor Bollard’s comments last week hint at how their view is evolving: they now see “a markedly weaker growth profile this year” as part of a cyclical adjustment, but with sound fundamentals and intense inflation pressures, which is much in line with our view. The ‘on hold’ bias will remain, but with an acknowledgement of the growing downside risks.
