US$ strengthens as "risk on" sentiment takes back stage; A$ up on stong labour force data

By Mike Burrrowes

NZD

Trading in the NZD/USD was subdued over the past 24-hours compared to recent volatility. It traded in a range of 0.7890 to 0.7960 and is currently trading around 0.7940. Globally, momentum in the “risk on” trade appears to have faded, with no further positive news to drive sentiment higher.

Locally, yesterday’s Performance of Manufacturing Index remained in expansion territory at 50.8 for September. It has edged down each month from a peak of 54.7 in May. The four consecutive small declines have accumulated to a noticeable slowdown in the manufacturing sector since the middle of the year. However, the fact that activity is still expanding sets it apart from similar indicator in many other regions globally.

The NZD/AUD gapped lower yesterday after the positive surprise in the Australian employment report. It fell sharply from 0.7830 to below 0.7780 before recovering to 0.7800 overnight.

Relative to its European peers, trading in the NZD was more range-bound. The NZD/GBP currently trades around 0.5050 and the NZD/EUR around 0.5770.

There are no NZ or Australian data releases today, so expect the NZD to take its cue from global risk sentiment. Expect further consolidation in the NZD after its surge higher in recent days.

Majors

Trading for most currencies over the past 24-hours was in a relative tight band. As the rally in “risky” assets seems to have run out of steam for now, the USD and JPY outperformed.

The financial sector in Europe lead the Euro Stoxx 50 index lower, to close down 1.7%. Similarly, financials were the worst performers in the S&P500index (currently down 0.6%) after JPMorgan announced a 33%y/y profit decline in Q3. Global commodity prices consolidated after recent gains, with the WTI oil price off over 1%. Our risk appetite index (scale 0-100%) remained steady at a low 33%. Market optimism was also dampened by Chinese trade data yesterday that showed exports had slowed to 17%y/y in September (21% expected).

In the backdrop of fading risk appetite, the USD no longer saw the heavy selling pressure of recent session. The USD index held up around 77.10, having made a high above 77.40 overnight. The JPY was the strongest performer over the past 24-hours, gaining 0.5% against the USD. The USD/JPY currently trades at 76.90.

The only other currency to gain against the USD was the AUD. Trading in the AUD/USD was fairly choppy over the past 24-hours. The AUD was boosted yesterday afternoon by a better-than-expected employment report. It showed a 20K employment change (10K expected), and the unemployment rate ticking down from 5.3% to 5.2%. The market has revised down expectations for rate cuts from the RBA (see below). The AUD currently trades around 1.0180.

The other “commodity-linked” currencies, CAD and NZD, did not fare quite so well as risk sentiment waned. The CAD and NZD declined 0.2% and 0.3% respectively relative to the USD. The USD/CAD currently trades around 1.0200.

Trading in the European currencies was tempered by a lack of key data releases or new headlines in the European debt crisis. The EUR/USD dipped as low as 1.3690 early this morning before trading back to 1.3770 currently.

Tonight we get the release of Eurozone CPI data. This will be important to see how inflationary dynamics are unfolding in the region. While the ECB grapples with the region’s debt woes it is still mandated to keep inflation in check. We also get US retail sales data as an indicator of the health, or otherwise, of the US consumer.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.