by Mike Jones
NZD
The gloss has started to come off the euro party, with the EUR and general risk sentiment given up some of Friday’s outsized gains. However, the NZD has held up rather well against this less optimistic backdrop. The NZD/USD spent the night inching its way towards 0.8050.
Weak global manufacturing data released overnight cast a dark cloud over the global economic outlook. It also provided a timely reality check for those investors getting carried away with the weekend’s positive EU Summit.
And with Finland and the Netherlands challenging the apparent European unity on display on Friday (they said they will oppose sovereign bond buying by the ESM), the stage was set for a bout of EUR selling.
The EUR/USD gave up around a cent of Friday’s gains. While this paved the way for a modest strengthening in the USD, the NZD was largely unaffected. This reflected both solid NZD/EUR demand, and a rising yield differential.
Indeed, NZ-US 3-year swap differentials, at 235bps, are around 10bps higher than this time last week, and almost 60bps above their early June lows.
As we have noted in the past, the spectre of additional global policy easing, alongside steady NZ interest rates, should act to maintain the relative yield appeal of the NZD, keeping the NZD/USD underpinned.
Today’s ANZ Commodity Export Price Index may well stabilise, or even bounce a little, having lost a cumulative 10% this year. However, Wednesday morning’s dairy auction will be the more interesting test of whether the lessening-supply story is able to support prices despite the global uncertainties.
This afternoon’s RBA policy meeting will occupy most of traders’ attention during our time zone. Market and analyst expectations are for rates to be left on hold at 3.5%.
The tone of the accompanying statement will be important to the extent most expect another rate cut in August and OIS markets still anticipate a further 80bps worth of RBA easing over the coming 12 months.
Should the statement cast doubt on the need for this much easing, expect a pop in the AUD/USD, with the NZD/AUD likely to slip back to support around 0.7810.
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Majors
The ‘safe-haven’ USD and JPY outperformed overnight, as the cold reality of a slowing global economy offset optimism over the weekend’s EU Summit.
A bevy of weak global manufacturing data reawakened fears over a global economic slowdown. Most notably, the June US ISM fell into contractionary territory for the first time since 2009 (49.7 vs. 52.0 expected). The new orders component fell to 47.8 from above 60.0.
Across the Atlantic, the news wasn’t much better. The UK manufacturing PMI beat market expectations but remained well below 50 (48.6 vs. 46.5 expected). Spanish, Italian, and Greek PMIs contracted at a faster pace, with the German and French numbers only slightly better.
While European equity markets managed to post modest gains, US indices are flat to slightly down. Oil prices have given back some of Friday’s gains (down 1.5%), and the VIX index (a proxy for risk aversion) rose from 17% to almost 18%.
With investors again growing cautious on the global economy, ‘safe-haven’ demand for the USD and JPY slowly returned. USD/JPY slipped from around 80.00 to 79.50. The EUR led the declines amongst the majors.
The EUR/USD shed around a cent in choppy trading to sit around 1.2580 currently. Chatter that Finland and the Netherlands would block secondary bond purchases by the ESM ensured the EUR underperformed. Germany also reminded everyone that aid comes with conditions.
Looking ahead, we suspect markets’ focus will begin to shift to what central banks can do to support the global economy. While the RBA should stay on hold today, further easing is expected from the Bank of England and ECB later in the week.
Moreover, any weakness in Friday’s US non-farm payrolls may well be seen as a green light for more quantitative easing from the Federal Reserve. As a result, we expect broader risk sentiment to hold up in the short-term. Support on the EUR/USD at 1.2445 should hold. Near-term support is eyed at 1.2575.
Other news: EU final PMI 44.8 (versus 45.1 expected), with Germany at 45.0 (44.7 expected), France 45.2 (45.3 expected), and Italy 44.6 (44.6 expected). *US construction spending 0.2%m/m in May (0.9% expected).
Event Calendar:
3 July: NZ commodity prices; AU RBA meeting; CH non-manufacturing PMI; US factory orders; 4 July: NZ dairy auction; SW Riksbank meeting; EU final services PMI; US Independence Day; IT budget; UK services PMI; 5 July: ECB meeting; EU Draghi press conference; SP debt auction; UK BoE meeting; US ADP employment; US jobless claims; US non-manufacturing ISM; 5 July: NZ Crown Accounts; US non-farm payrolls; UK PPIs
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