The New Zealand dollar (NZD) is on a tear. Thursday marked the tenth consecutive trading day the currency has either held steady or extended higher against the US dollar (USD), and this uninterrupted rally highlights the importance of monetary policy direction in the movement of currencies.
The Fed's decision to maintain its current level of asset purchases should have driven all other major currencies higher, but the only one that has reacted accordingly has been the NZD. And, the reason for the outperformance is simple: the Reserve Bank of New Zealand (RBNZ) said it is planning to raise rates in 2014, a hawkish bias that sets the RBNZ significantly apart from its global peers.
Economic data has also been good, further supporting the case for tightening. Last night, we learned that New Zealand's economy grew a 0.2% rate in the second quarter. While this was slower than in Q1, on an annualized basis, GDP growth hit 2.5%, which was stronger than anticipated, and growth would have been hotter in Q2 if not for the significant upgrade in the first quarter.
In all, if New Zealand’s economic data continues to firm, the RBNZ could be first major central bank to raise interest rates.
Meanwhile, the rally in NZDUSD may be overextended at this point, and a correction to .8200 is not impossible, although we would view any pullback as an opportunity to buy at lower levels in anticipation of a move to .8600.
The #1 Headline from the Eurozone
The euro (EUR) ended Thursday slightly higher against the US dollar, and with no Eurozone data on the economic calendar, the move can be attributed entirely to dollar weakness. European finance officials have tentatively approved a change in the region's budget rules to relieve pressure on debt-ridden countries like Spain and Portugal, although approval still needs to be confirmed by senior officials next week.
The top headline from the region was actually the Italian Senate's decision to postpone its hearing on embattled Silvio Berlusconi to October 4. The repeated delays show how difficult the decision is from a political standpoint and how much is at stake. The Senate fears that expelling Berlusconi could lead to collapse of Italy’s coalition government, but the delayed vote comes as good news for the euro because it removes a near-term risk for the shared currency. European stocks are also at five-year highs, which further supports the currency.
SNB Boosts 2013 Growth Forecasts
Aside from the surprisingly weak UK retail sales report, the focus during Thursday’s European trading session was the Swiss National Bank (SNB) monetary policy decision. As expected, the SNB left rates unchanged, but it is worthwhile to note that the Bank upgraded its 2013 GDP forecast from 1.0-1.5% to 1.5-2.0%, which signals more optimism about the recovery.
The central bank still feels that a EURCHF floor is necessary, and it pledged to continue to intervene in unlimited size to enforce this level, although we are beginning to see the fruits of the SNB’s labor. While Switzerland's trade surplus shrank in the month of August, exports grew by 0.8%.
The SNB expects more external demand in the second half of the year as the US and China both continue to recover, which could lead to stronger gains in the Swiss franc (CHF), particularly versus the euro.
By Kathy Lien of BK Asset Management