by Mike Jones
NZD
The NZD has spent the past few sessions squeezing higher in relatively choppy trade. Relative to our last report on Friday, the NZD/USD is just shy of ½ cent higher around 0.7570.
On the face of it, the steady performance of the NZD seems remarkable given the backdrop of crumbling risk sentiment. A run of terrible global data, culminating in US non-farm payrolls, hammered equity and commodity markets on Friday. US stocks skidded 2.4-2.6% lower, the CRB commodity price index declined 1.7%, and our risk appetite index (scale 0-100%) fell to 32% – a 7-month low.
The broad deterioration in risk appetite has seen the ‘growth-sensitive’ NZD underperform most of the major currencies (with the exception of the AUD and CAD). However, with hopes of more Fed stimulus weighing on the USD, the NZD/USD managed to broadly hold its own.
That is not to say there hasn’t been volatility. Generalised uncertainty and rising fears about the strength of the global economy has seen NZD volatility continue to rise.
One-month NZD volatility (traded in the options market) climbed to 6-month highs above 15% overnight. As recently as early May, NZD vols were plumbing 9% lows. Expect ongoing volatility while market participants remain uncertain about the global backdrop.
Declines in NZ commodity prices have eroded support for the NZD support of late. From this perspective, tomorrow morning’s milk price auction will be important. Will prices begin to stabilise – as Fonterra hinted at a couple of weeks ago – or keep falling?
Later on Wednesday morning the Government publishes its Financial Statements for April. Then we see the Q1 building figures, which we expect to register another reasonable gain, in the order of 3.0%. Another GDP indicator comes our way Friday, in the form of Wholesale Trade.
We anticipate this to be consistent with our forecast expansion in Q1 GDP of 0.6% (official GDP figures due 21 June).
There is no local data due for release today. All eyes are on the RBA across the Tasman. Our NAB colleagues expect a 25bps cut. Market pricing is consistent with a 25bps cut and a 60% chance of a larger 50bps cut.
So if 50bps is not delivered the knee-jerk reaction will be to push the AUD/USD higher, and the NZD/AUD lower. However, much will depend on the tone of the statement. A statement that keeps market pricing of 125bps of further easing may end up weighing on the AUD.
Expect the NZD/USD to take its cues from the AUD on the day. Initial support is seen at 0.7530 with resistance expected on bounces towards 0.7650.
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Majors
Risk aversion has continued to climb since our last report on Friday. Gathering fears of a global slowdown have undermined market sentiment, pummelling equity markets and commodity prices.
Despite the deterioration in risk appetite, the ‘safe-haven’ USD has actually fallen, thanks to speculation of additional Fed stimulus.
Friday’s global economic data made for worrisome reading. Most notably, the global manufacturing sector appears to be cooling rapidly after its strong run.
The Chinese PMI barely managed to hold above 50 on Friday (52.0 expected), European and UK PMIs fell to levels consistent with deepening recession, and the US ISM index undershot analysts’ expectations.
However, it was US payrolls data that did most of the damage. Just 69k jobs were added in May, well shy of the 150k expected.
In the wake of the weaker data, US 10-year bond yields collapsed to fresh 60-year lows around 1.45bps. Equity markets backpedalled rapidly and the VIX index (a risk aversion proxy) leapt from 23% to 6-month highs above 27%.
After climbing initially, the USD fell out of favour as the weak jobs figures boosted the chances of additional Fed easing.
The EUR led the gains against the softer USD, with the risk sensitive currencies (NZD, AUD, CAD) lagging. However, compared to the carnage elsewhere, movements in currency markets have been relatively limited over the past few sessions.
The EUR/USD is 1% higher around 1.2500. This likely reflects market hopes central bankers will ride to the rescue of the global economy with more policy stimulus. Unfounded chatter about coordinated G8 intervention and the introduction of negative interest rates in Europe has done the rounds.
Looking ahead, this week is all about central bank meetings. The RBA is expected to ease rates 25bp today, with market pricing consistent with a decent chance of a 50bps cut. The Bank of Canada should keep rates unchanged.
No change is expected from the Bank of England, although the risk of an increase in asset purchases is growing. The ECB decision will likely attract the most attention. The market expects rates to be left unchanged at 1%. But there is now a lot of chatter about the potential for the ECB to a) lower rates or b) announce further LTROs (cheap cash for banks).
There will also be some focus on Fed Chairman Bernanke's testimony before Congress on Thursday. Weaker employment data has raised the odds of additional Fed easing, but broader US data remain solid enough. Any hint of QEIII from Bernanke would further weigh on the USD, but we doubt we’ll get any such hints.
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