New Zealand Dollar Takes Direction From Commodity Prices As Yield Outlook Fades

NZD/USD

A return of risk appetite has generated NZD/USD support and has kept the pair within its medium term range. Upward trending commodity prices have helped limit downside risks as they currently account for 63% of price action. The relationship has improved from 50% a month ago as broader shifts in risk sentiment has led to greater correlation amongst risky assets. A target rate of 2.50% makes the “kiwi” one of the high yielders despite it being a record low. Meanwhile, the dimming outlook for a RBNZ rate hike continues to be a weighing factor on the antipode currency, but we have seen interest rate expectations lose their influence as markets have begun to accept that the central bank’s target of a mid-year hike will most likely be kept. The pair’s correlation has fallen to 25% from 41% a month ago as the outlook for yields has taken a back seat to risk trends.

RBNZ Interest Rate Expectations

Overnight Index Swaps are pricing in a 140 bps of tightening over the next twelve months which is sharply lower from 191 bps on February 1st. Flat retail sales and rising fourth quarter unemployment validated the central bank’s cautious stance. The central bank will convene to determine future monetary policy next week and is expected to remain on hold as downside risks remain in the economy. Fears are that dairy prices may have peaked which could reduce the value of future exports. The fourth quarter manufacturing activity report and second quarter manpower survey will cross the wires beforehand and could offer insights into the central banks mindset. To discuss this and trading ideas join the NZD/USD forum.

FOMC Interest Rate Expectations

Fed funds futures went from giving a 4.0% chance of an April rate hike to 4.3% following the better than expected U.S. non-farm payroll report. The job loss of 36,000 may of beat expectations but is far from inspiring policy makers to consider tightening. Sustainable job growth is necessary before the Fed would consider tightening, unless inflation rises at a troubling pace and poses a greater threat to the recovery. Upcoming advance retail sales for February, is the next major event risk and could have an impact on interest rate expectations. The expected 0.2% decline is mainly a product of the severe weather that impacted large parts of the country during the month. The result may be overlooked as it will give little insight into the longer-term trend.

Commodities

Commodity prices continue to trend higher as strong growth figures and an improving situation in Greece have fueled risk appetite. Copper continues to be a standout as the earthquake in Chile is expected to impact inventory levels. A developing wedge could signal a potential breakout. However, we could be seeing resistance at these levels which could increase downside risks for raw material prices and the “kiwi”. Discuss this and other fundamental data join the Economics Forum.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com