By Mike Jones
NZD
The NZD has opened the week on the back foot following the weekend’s weak Chinese data.
After climbing to almost 0.8040 on Friday night, the NZD/USD has slipped back to around 0.8000 this morning.
Having been starved for news for weeks, currency markets are now grappling with a stacked calendar of events, and a range of conflicting signals.
Fed rhetoric around the weekend’s Jackson Hole conference signalled another asset purchase programme is in the barrel, waiting to be fired. This presents headwinds for the USD.
At the same time, China’s August PMI revealed the Chinese economy is still slowing. While this is negative for risk appetite, and positive for ‘safe-haven’ assets like the USD, there is also the likelihood of further Chinese policy easing to balance.
For now, the bears are in the ascendancy and the NZD/USD is off its Friday highs. However, as we noted on Friday, domestic fundamentals are still positive, and the US Fed looks set to keep the USD weak. We suspect these factors will limit NZD/USD dips to 0.7840 this week.
Still, there is so much event risk this week the only thing we can be really sure of is that there will be volatility. A raft of central bank policy announcements, including the all-important ECB meeting, and a bunch of top tier US, Chinese, and European data will cast new light on the outlook for global growth. It’s also a big week across the Tasman, with the RBA policy meeting, Q2 GDP, August employment statistics, and July trade data all due for release.
NZ’s data schedule throws up a trifecta of Q2 GDP indicators this week. But it’s the commodity price data that will be most important for the NZD. We’re expecting some reprieve in Tuesday’s ANZ commodity price index, after last month’s 0.5% fall. And we’re looking for a further rebound in dairy prices at Wednesday morning’s GDT auction.
Further uplift in dairy prices owing to the US drought is part of the reason we expect the NZD/USD to hold up this year.
Keep an eye out as well for this morning’s Overseas Trade Indexes. We’re bracing for a 2% decline in the terms of trade (the fourth consecutive quarterly fall). The market also expects -2%q/q. The data is a little backward looking and more recent commodity price information has been more positive. As a result, the NZD may look through any weakness.
On the day, initial support for the NZD/USD is eyed 0.7930, with resistance expected on bounces towards 0.8030.
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Majors
The USD weakened against all of the major currencies on Friday as Fed officials continued to dangle the QEIII carrot in front of markets. Risk-sensitive assets like equities and commodities rallied, while US bond yields fell sharply.
Most of the damage was done before Fed chairman Bernanke even took the podium at Jackson Hole. Month-end rebalancing flows, and dovish comments from Fed officials Williams and Bullard weighed heavily on the USD. Williams (a dove) said recent US data “would argue for additional accommodation now”. Against the backpedalling USD, the EUR pushed up around a cent to 1.2600, with the rest of the majors following the single currency’s lead higher.
Bernanke’s speech, in contrast, ruffled few feathers. As we suspected, he essentially repeated the message from the July FOMC minutes. That is, while another instalment of asset purchases (QEIII) is not yet certain, the door is wide open should upcoming US data (in particular labour data) remain lacklustre.
Friday’s USD sell-off is being questioned this morning following the weekend’s worrying Chinese data. The August manufacturing PMI slipped to 49.2 (50.0 expected), the lowest since November. This shouldn’t have been too much of a surprise given the weak HSBC Flash estimate.
Nonetheless, the knee-jerk reaction has seen the AUD/USD open the week ½ cent lower around 1.0290. The USD and JPY are again drawing in ‘safe-haven’ support. Still, we’d expect the extent of the reaction in the AUD, NZD, and risk assets to be limited by a) hopes for more Chinese policy stimulus to stop the rot, and b) Fed easing expectations acting to cap rallies in the USD.
This week marks the beginning of a month crammed full of important global and domestic events. Central banks will be in focus this week. The RBA, Bank of England and Bank of Canada are widely expected to keep rates on hold and markets should take the meetings in their stride.
In contrast, there is heightened potential for volatility around the ECB meeting (Thursday). The latest polls are split roughly 50/50 on whether the ECB will cut rates from 0.75% to 0.5% in September. We are in the 25bps rate cut camp. Whatever, there will be much more interest in whether any details are released on the ECB’s new bond buying programme. Hints of an imminent restarting of the SMP programme would certainly be positive for risk appetite. However, significant differences still remain within the ECB, so we’re not getting our hopes up just yet.
This week’s top tier US data will also be important to watch. Bernanke’s expression of “grave concern” over the state of the labour market means a weak non-farm payrolls read on Friday (+125k expected) would all but seal the deal for additional easing at the 14 September FOMC meeting. Tuesday’s ISM manufacturing report will also be key in this regard. US markets are closed tonight for the Labour Day holiday.
Other news: *Spanish bank Bankia set to receive financial aid from the FROB after reporting of a huge loss. *S&P downgrades Spanish region Catalonia to BB/B negative outlook. *WSJ says iron ore price collapse has caught the eye of the RBA.
Event Calendar: 3 September: NZ terms of trade; CH non-manufacturing PMI; AU retail sales; AU job ads; CH HSBC manufacturing PMI; EU PMIs; US labour day holiday; 4 September: NZ ANZ commodity prices; AU current account balance; AU RBA policy meeting; UK PMI construction; EU PPIs; US ISM manufacturing; US construction spending; 5 September: AU GDP; CH HSBC services PMI; UK PMI services; EU PMI services; EU retail sales; 6 September: AU employment; JN BoJ chief Shirakawa speaks EU Q2 GDP; UK BoE policy decision; EU ECB policy decision; US ADP employment; US jobless claims; US ISM non-manufacturing; EU ECB chief Draghi speaks; 7 September: AU trade balance; UK industrial output; UK manufacturing production; UK PPIs; US non-farm payrolls;
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