Subdued end to a volatile week, but a busy one ahead with FOMC, RBA and G20 meetings

By Mike Burrrowes

NZD

The NZD fell slightly against the USD on Friday in relatively quiet trading. However, over the course of the week, NZD/USD gained around 2 cents to be trading just above 0.8200 currently. Sentiment towards the risk sensitive NZD was boosted by the announcement of the EU rescue package.

The move higher in NZD/USD over the past week was reflected in our “fair value” model. The implied NZD/USD “fair value” range moved 1 cent higher to 0.7350 – 0.7550. The move higher was driven by the NZ-US 3-year interest rate differential widening from 2.62% to 2.66%; and our weekly risk appetite index surging from 37.1% to 43.7%. While the “fair value” range has moved higher, it still suggests some downside risks to the currency in the near-term.

The NZD traded in a tight range relative to the EUR and GBP. NZD/EUR fell to an intra-day low around 0.5660, but recovered to 0.5800 early Saturday morning. The NZD lost some ground against the better supported GBP, falling from above 0.5100 to 0.5090 currently.

NZD/AUD spent the evening treading water around 0.7660. There is no shortage of event risk to push the cross around over the week. On Tuesday, the RBA is expected to cut its policy rate by 25bps after last week’s low CPI reading. On Wednesday, we have AU retail sales and on Friday the RBA will provide more detail on its rate decision with its Statement on Monetary Policy.

The data highlight this week will be the NZ employment data for Q3, released on Thursday. Early Wednesday morning we get the latest results from bi-monthly Fonterra dairy auction. Expect the move lower in the USD over the past week to support dairy prices in USDs. For the week ahead, support on NZD/USD is initially seen at 0.8110 and resistance at 0.8300.

Majors

It was a relatively subdued end to the week for financial markets. The USD made modest gains against nearly all the major currencies as risk appetite stalled. The European currencies were the worst performers.

Sentiment was mixed across markets on Friday, perhaps reflecting a market exhausted from a busy week. The S&P500 index ended flat, but gained 3.8% over the week. The Euro Stoxx 50 index lost -0.6% on Friday, but the EU rescue package helped the index gain 5.3% over the week. Our risk appetite (0 – 100%) held steady around 43.1%, from 32.5% at the beginning of the week.

The EUR failed to continue the impressive rally seen Thursday evening after the EU rescue package was announced. EUR/USD trickled lower from 1.4200 to around 1.4150 currently.  A poor Italian bond auction on Friday night served to remind investors that the EU rescue package will not be the panacea to Europe’s problems. The Italian bond auction saw 10-year yields rise above 6% (see Fixed Interest Section below).

The ECB meeting this week will be important for the near-term direction on the EUR. The OIS market is currently pricing a 20% chance of a 25bp cut from the ECB on Thursday. This is the first meeting for the new ECB President Draghi.  

The GBP bucked the stronger USD trend, rising from 1.6080 to 1.6120 currently. GBP/USD has appreciated 4.5% since the Bank of England announced QE on 7 October. However, most expect QE from the BoE to weigh on the currency over the coming months.

Data outturns in the US were mixed. The University of Michigan consumer confidence for October was stronger-than-expected at 60.9 (58.0 expected). However, the core PCE data for September (the Fed’s favoured inflation measure) was lower-than-expected at 1.6% y/y (1.7% expected). Falling inflation would give the Fed further evidence to undertake QE3.

It’s likely to be an action packed week ahead. The highlights will be the FOMC rate decision on Thursday morning. No change in rates and QE is expected. On Thursday evening we have the ECB rate decision. The G20 in Cannes, on 3 – 4 November, will be closely watched as the EU is expected to unveil further details of the rescue package.

Also at the G20 meeting, the Japanese Prime Minister, Noda, is expected to voice concern over the strong JPY. However, given the issue in Europe and the US it’s unlikely the Japanese will get too much sympathy from the other nations. On the data front, throughout the week we will get the monthly PMI updates from most major nations; UK GDP for Q3 on Tuesday; and the important US non-farm payrolls on Friday.

Mike Burrowes is part of the BNZ research team. 

All its research is available here.