NZD outperforms thanks to sharp USD correction
Daily Currency UpdateThe New Zealand dollar outperformed through trade on Thursday despite a broader sell off across equity markets and elevated risk aversion. The NZD edged lower through the domestic session following softer than anticipated Q1 GDP print. Data confirmed the economy contracted 0.2% through the first three months of the year and now raises the risk the NZ economy will slip into recession as the global growth outlook slows, interest rates surge and the property market corrects lower. With the RBNZ calling for a 0.6% uptick in economic activity the miss prompted an immediate fall in NZ rates, taking some heat off the RBNZ and dampening calls for the RBNZ to deliver a supersized 75 basis point hike. Having marked intraday lows at 0.6235, the NZD then surged higher overnight, buoyed by broad based US dollar weakness. Softer than anticipated US data sets and rising fears of recession overwhelmed the dollar and outweighed haven plays in the risk off environment. Having lurched through 0.6350, the NZD touched intraday highs at 0.64, before moving back to 0.6360 into this morning’s open.
All in all it was a wild day across financial markets and we expect volatility will continue as markets continue to adjust to changing data sets.
Key MoversThere was plenty of price action through trade on Thursday, with lumpy moves across key majors dominating headlines into this morning’s open. The dollar index plunged 1.4% following a string of softer than anticipated domestic data sets and rising fears of recession. Housing starts and new build permits fell sharply in May, while mortgage applications continued to fall and business confidence indicators fell. Another increase in jobless claims and reports of rising layoffs added and advanced fears a recession is inevitable. Despite the risk off backdrop and safe haven bid, rising concern for inflation overwhelmed the dollar. Markets have long overvalued the USD and the rising risk of recession may well be the catalyst that prompts a long-awaited downward correction.
The Great British pound was the days best performer, lurching higher following the Bank of England monetary policy update. As expected, the MPC increased rates by 25 basis points refusing to follow other major counterparts in supersizing monetary policy adjustments. While the GBP fell in the wake of the announcement, marking lows at 1.2050, the accompanying rate statement helped elevate forward estimates and propelled the currency higher. The Bank left ample room to accelerate the pace and timing of future hikes, while upgrading its inflation forecasts. The committee was at pains to highlight it is “particularly alert to indications of more persistent inflationary pressure and will, if necessary, act more forcefully in response”. This comment bolstered expectations for future rate adjustments and prompted markets to price in a 50 basis point hike at the next meeting and 175 basis point increase to 3% into the end of the year. Sterling surged to intraday highs at 1.24, before edging back to 1.2350 on open this morning.
In other news, the Swiss National Bank unexpectedly raised its policy rate 50 basis points to minus 0.25% in a bid to counter rising inflationary pressures. With further rates hikes signaled, the CHF surged, up over 3% on the day and forcing the USD to lows at 0.9640.
Our attentions today turn to the Bank of Japan. With major central banks tightening monetary policy conditions, we are keenly attuned to any policy response from the BoJ. With the BoJ at loggerheads with the rest of the world, a statement on the weakening yen and the future of its Yield Curve Control platform will be crucial in guiding direction into the weekend.
- NZD/USD: 0.6220 - 0.6420 ▲
- NZD/EUR: 0.5980 - 0.6050 ▼
- GBP/NZD: 1.9250 - 1.9580 ▲
- NZD/AUD: 0.8930 - 0.9080 ▲
- NZD/CAD: 0.8080 - 0.8320 ▲