New Zealand Grabs the Spotlight

In an otherwise quiet foreign exchange market, the New Zealand took the spotlight, selling off in response to the revelation the central bank governor that it has sold some New Zealand dollars and may do so again. The evidence suggests the intervention was most likely token at best.  A colorful quote from Finance Minister English suggesting that New Zealand only had a "peashooter" to protest currency appreciation has been recycled.  

The admission that the peashooter was used succeeded in driving the New Zealand dollar down by around 0.8% today and triggered a sharp move on the cross against the Australian dollar. The Australian dollar has been trending lower against the New Zealand dollar most recently since mid-March and yesterday recorded 4-year lows, breaking below NZD1.20 before reversing higher.

Sweden's Finance Minister Borg also expressed concern about the strength of the krona. Sweden had generally accepted the best practices as they have emerged from the G7/G20 meetings (G7 meeting this weekend)regarding currencies--best determined in the market and ought not be the objective of policy--. 

Comments that Borg made in Nigeria yesterday are being seized upon by some observers and reporters as a changing of policy. This seems to be an exaggeration. Borg is quoted saying that "The krona could become an issue, particularly from the central bank perspective; there are some good arguments for them to consider how to look at the krona...It should be based on fundamentals and obviously priced on the market, but there are also some risks you'll see too much of an appreciation. That's obviously one of the worries we have." We see this as general observations and would most certainly not expect a Swedish finance minister to indicate a currency policy shift on a trip to Africa.

Norway's central bank is expected to leave rates on hold at the conclusion of today's meeting. There is a modest risk of a cut and today's news that manufacturing fell 0.7% in March (the consensus as for a 0.3% decline)has encouraged some to position for a surprise. The case for it to remain on hold is more a function of trying to guess the timing of the cut, which is anticipated, and the impact of a nearly 4% decline in the krone on trade-weighted terms since mid-February.

The euro is been bid to a new high for the week, but has remained below the post-US employment report high near $.13160.  It was helped by Germany, following yesterday's strong factory orders report,  with robust industrial production data.  The recent survey data has painted a too pessimistic of a picture. Industrial output in March rose 1.2% after a 0.6% increase in February. Manufacturing output itself was even stronger, posting a 1.4% increase. 

 The poor weather (coldest March in a quarter of a century), took a toll on construction (-3.1%), while helping boost energy output( 4%).    The 2.1% increase in capital goods output dovetails with the rise in such orders as well.  In addition, the fact that foreign orders were up 2.7% (domestic orders up 1.8%) point to healthy exports in the period ahead.  Germany is set to report Q1 GDP on May 15, after Q4 12 GDP contracted  by 0.6%. 

Sterling is trying to recovery from yesterday's cross-rate induced slide,which may have also forced out some longs as the $1.56 cap remained intact.  The proximity of the MPC meeting may have also deterred participation.   The $1.5520-40 area looks sufficient to cap today's bounce.  The recent string of data suggests the dovish faction led by Governor King favoring a resumption of gilt purchases may not have won over any other MPC members. 

China reported a larger than expected trade surplus. Both exports and imports were also greater than expected. The April trade surplus stood at $18.16 bln, after a small deficit was recovered in March (distorted by the Lunar New Year). Exports rose 14.7% year-over-year after a 10% increase in March . The market expected about a 9.2% increase. Imports rose 16.8% from a year ago, instead of the consensus forecast for a 13% rise after a 14.1% increase in March. Consumer and producer price indices are expected to be reported tomorrow. 

To our surprise, the yuan has strengthened to new 19-year highs. The yuan has completely recovered from the crack down announced at the start of the week on the imbalances banks had between the foreign currency deposits and loans. This has triggered a sharp short squeeze on Monday, but between yesterday and today the yuan has recorded its largest two-day advance in over a year. This would seem to suggest that the capital inflows into China remain strong.