by Mike Jones
NZD
It’s been another lethargic 24 hours for currency markets and the NZD. The NZD/USD spent most of the overnight session drifting lazily sideways in a 0.8020-0.8060 range.
A fairly dismal set of Eurozone services PMI took some of the gloss off investors’ risk appetite overnight. But while a reasonable toll was taken on the EUR, the NZD once again held firm. In fact, the NZD/EUR climbed to fresh all-time highs above 0.6400. We continue to look for a NZD/EUR ‘peak’ around 0.6500/0.6600.
As we’ve frequently noted, the currency’s recent outperformance reflects solid NZ fundamentals. Not only is NZ economic growth expected to outpace most of our trading partners this year, but a high and widening interest rate differential is attracting capital inflows. For example, NZ-US 3-year swap differentials have increased from 180bps at the start of June, to 235bps currently.
In addition, soft commodity prices are experiencing a strong run, which is also bolstering NZD sentiment. US drought conditions have seen wheat prices rise to 9-month highs, while corn prices have surged to all-time highs.
Ultimately, this is a positive sign for NZ’s (predominately ‘soft’) export commodity prices.
On the data schedule for today, the Australian trade balance for May is expected to register a A$500m deficit. Meanwhile, NZ Prime Minister Key is speaking at a Trans Tasman Business lunch in Sydney. Keep an eye out for headlines from 2pm (NZT).
Still, none of this should ruffle the NZD or AUD. Instead, tonight’s ECB and BoE decisions should set the tone for risk appetite and the ‘risk sensitive’ currencies. This is particularly so given central bank stimulus is being relied upon to prop up the global economy.
Additional stimulus would likely further juice up risk appetite and the NZD/USD, while a lack of action would weigh heavily. For today, expect the familiar 0.8000-0.8110 range to contain the NZD/USD.
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Majors
Once again, most major markets treaded water overnight. US markets were closed and trading interest and volumes were relatively light as investors looked ahead to tonight’s ECB meeting and Friday’s US payrolls figures.
The USD is a little stronger, largely thanks to EUR selling.
In an otherwise quiet night, the final reading of Eurozone and UK services PMI got a bit of attention. Overall, they made for grim reading. The UK edition fell to the lowest level since 2011 (51.3 vs. expectations of 52.9).
And, while there was some improvement in French and Italian readings, the German index fell into contractionary territory for the first time since September 2011.
The uninspiring data took a little more of the shine off risk sentiment and the EUR. European equity indices fell 0.1-0.7% and around ½ cent was shaved off both the GBP/USD and EUR/USD.
Looking ahead, all eyes now turn to tonight’s policy decisions from the ECB and BoE. We expect the Bank of England to lower its cash rate 25bps to 0.25% and increase asset purchases £50b to £375b. This sort of outcome is by no means fully priced by the market. So a result on our expectations would be consistent with GBP underperformance.
Some form of easing is expected from the ECB, but the market is unsure of the means (rate cuts, deposit rate cuts, liquidity injections). We expect ‘just’ a 25bps rate cut (taking the refi rate to 0.75%). But there is certainly a chance we get more aggressive measures. In any case, the key question is how the EUR reacts.
While easier monetary policy is usually bad news for a currency, we suspect ECB easing would actually support the EUR (at least initially) as investors play up the ‘pro-growth’ implications.
Other news: Swedish Riksbank leaves its Repo Rate unchanged at 1.50% (as expected), but lowers its rates forecast and notes rates could be cut if EU crisis worsens. SEK climbs 0.7% in response. HSBC Chinese Services PMI slips from 84.7 to 52.3 in June, the slowest in 10 months. EU retail sales figures for May exceed analyst expectations (0.6%m/m vs. 0.0% expected).
Event Calendar:
5 July: ECB meeting; EU Draghi press conference; SP debt auction; UK BoE meeting; US ADP employment; US jobless claims; US non-manufacturing ISM; 6 July: NZ Crown Accounts; US non-farm payrolls; UK PPIs
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