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CBA FX Strategy - NY Open

Posted by Marge Maresca on May 8, 2013 7:43:00 AM

It has been another quiet morning in Europe. German industrial production rose by 1.2% MoM in March, following an upwardly revised 0.6% MoM in February. This was stronger than expected and again suggests that the German economy was performing reasonably through QI. GDP numbers will be published next week, but should report a sharp rebound in QI. The EUR edged up following the release but has remained capped by the 1.3150 area so far. Elsewhere there has been little to report. France is on public holiday, UK news has been confined to a decent house price gain in April. EUR/GBP has edged up to 0.8475.

Overnight NZD/USD dropped over 1% in Asian trade, after the RBNZ Governor said the RBNZ sold the NZD last month. The comments came in a Q&A session at a parliament finance and expenditure select committee meeting, following the release of the latest RBNZ Financial Stability report. Governor Wheeler noted that the RBNZ has “sold the NZD” and is “capable of further intervention”.  In our view, Wheeler’s comments relate to the "passive" FX reserve management undertaken by the RBNZ in November/December 2012 (and presumably over April). The NZD has recovered some of the 1% dip to 0.8360, and is trading around 0.8400 at the time of writing. More details on today’s developments, and our view on RBNZ intervention is at the bottom of this email.

The next NZD focus is now on the Q1 Household Labour Force Survey (11:45pm BST), which contains the quarterly employment and unemployment rate.  CBA economists expect a sharp 0.8% bounce in New Zealand employment over Q1.  The persistent weakness in employment in 2012 has been at odds with almost all other New Zealand economic indicators; New Zealand’s housing market, retail sales, and consumer confidence have all been strong over the last six months.  A rebound in New Zealand employment should increase pricing for Reserve Bank of New Zealand tightening over the next year and support the NZD. 

AUD/USD has lifted modestly off the Asian session low of 1.0155, boosted by China posting a larger than expected surplus of $18.2bn. in April.  Chinese imports of iron ore were 63.5mn tons in April or 10% more than the same month last year.  In value terms, China imports from Australia were up 11.1%(YoY) in April.  Imports from Australia over the Jan-April 2013 period are up 8.5%(YoY) compared to the same 4 month period in 2012.  The next Australian focus is the April labour market report tomorrow (2.30am BST).  We have an above consensus 15K lift in employment pencilled in, which should support the AUD.  Despite the drop in the wake of the RBA’s rate cut yesterday, we anticipate AUD will get back to its 2.5 year average of 1.0312 over the week ahead.

RBNZ – further details on today’s developments, and RBNZ intervention.

The release of the RBNZ’s Financial Stability Report (FSR) and the accompanying press conference prior to the select committee meeting highlighted the RBNZ’s balancing act between a strong housing market and elevated currency, but had little direct impact on the NZD.  The dip in the NZD resulted from comments by RBNZ Governor Wheeler during the Q&A session of his subsequent testimony to the Parliamentary select committee.  Governor Wheeler noted that the RBNZ has “sold the NZD” and is “capable of further intervention”. 

In our view, Wheeler’s comments relate to the "passive" FX reserve management undertaken by the RBNZ in November/December 2012 (and presumably over recent months).  Over November/December 2012 the RBNZ was a net seller of NZ$64mn and NZ$199mn respectively (see chart 1).  Over Q1 2013 the RBNZ sold a net NZ$28mn.  The data for April 2013 has yet to be released, but given Wheeler’s comments today additional FX reserve management (portfolio adjustment) by the RBNZ is likely to show up.  This is unsurprising, given the RBNZ manages a portion of its FX reserves on an unhedged basis (Open FX positions).  Significantly, the NZD TWI touched a new record high in April and was more than 2 standard deviations away from its long run average during this period (see chart 2).  In this vein, the NZ TWI remains above this level at present.

As we wrote in February, the RBNZ has only actively/overtly intervened on 1 occasion (June 2007) (see CBA FX Strategy: Is RBNZ intervention around the corner?, published 19 February 2013).  When the RBNZ “actively” intervenes to influence the NZD, in order to maximise the signalling impact, the RBNZ issues a press release shortly after any intervention confirming its actions and the rationale behind it.  The RBNZ has 4 strict intervention criterion. 

The RBNZ must be satisfied that all four criterion have been met before it will proceed: (a) the NZD is exceptionally high/low; (b) in the RBNZ’s assessment the level of the exchange rate is unjustified by economic fundamentals; (c) intervention will be consistent with the RBNZ’s Policy Targets Agreement (PTA); and (d) market conditions are opportune and there is material prospect of success (i.e. influencing the exchange rate). 

At this stage we do not think the criteria have been met, particularly point 4.  Nonetheless, further jaw boning from the RBNZ about the NZD is likely over the coming months, as is further RBNZ FX reserve management (see chart 3).


chart resized 600


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