By Mike Jones
NZD
It’s been a case of guilty by association for the NZD over the past 24 hours.
Weakness in the AUD has dragged the NZD/USD around ½ cent lower to flirt with support around 0.7975.
Yesterday’s NZ terms of trade figures certainly didn’t do NZD sentiment any favours.
The 2.6% drop in Q2 was the fourth consecutive decline.
Consequently, the terms of trade is now 6.8% below where it stood a year ago.
The bad news is that more of the same can be expected. Indeed, a deteriorating terms of trade is a key driver of the modest depreciation in the NZD we expect from mid to late next year.
However, it’s been more Aussie negativity and the weaker AUD that has been the real driver of the lower NZD.
A combination of yesterday’s weak Australian retail sales (-0.8%m/m vs. +0.2% expected), Saturday’s dismal Chinese PMI, and further falls in commodity prices (yesterday’s RBA index of such fell 4.3%m/m to be down 18.5%y/y) has seen the AUD/USD slide to one month lows below 1.0250. In the absence of any policy action from China, we expect continued AUD underperformance reflecting slowing Chinese growth and falling hard commodity prices.
Near-term direction for the AUD and NZD will come from today’s RBA policy meeting (4:30pm NZT). Ahead of this, Australian current account figures (1:30pm) may prove to be of passing interest for markets.
Analysts universally expect the RBA to keep interest rates unchanged at 3.5% today.
Similar to the July meeting, we expect the tone of the statement to be relatively neutral.
Yes, there is some risk the RBA downgrades its outlook in response to recent Australian data disappointment and commodity price declines. But part of this risk is priced in already.
Australian interest rate pricing is now consistent with a whopping 95bps of RBA rate cuts over the coming 12 months. Still, there is room for the market to bring forward the timing of rate cuts. Such a scenario would further weigh on the AUD.
Overall, we continue to hold a mild downside bias for the NZD this week. The next key support level at 0.7930 looks likely to be tested in coming sessions.
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Majors
With US markets closed, it’s been a night of quiet trading and consolidation amongst the majors. A late boost to risk appetite helped underpin small gains for most currencies against the USD.
Ahead of the ECB meeting on Thursday, ECB chief Draghi popped up on the wires making more soothing noises. His comment that he was “comfortable” with sovereign bond purchases of up to three years essentially confirmed to the market the ECB is getting pretty serious about reactivating the SMP.
On a quiet night, this was enough to elicit a small narrowing in peripheral sovereign spreads, modest gains in European equities, and a steadying influence on risk appetite generally. The EUR/USD enjoyed a small bounce from 1.2570 to 1.2600, paving the way for similarly sized gains in the rest of the majors. The GBP rose by more than most, as it bathed in the afterglow of a surprisingly solid UK manufacturing PMI.
Looking ahead, the return of US markets tonight should encourage a little more action in currency markets. This is particularly so given the August ISM manufacturing report for is due for release. These data tend to play second fiddle to non-farm payrolls (Friday) as the most influential US economic release.
Nonetheless, it will be important in gauging the Fed’s propensity to ease on 13 September. We suspect it will take a number well south of the 50.0 ‘breakeven’ mark to compel the market to price in QEIII and knock the USD markedly lower. Polled expectations are for 50.0.
Today’s RBA meeting will be the immediate focus. Near-term support on the EUR/USD will be found at 1.2490. Initial resistance is expected on bounces toward 1.2640.
Other news:
*August final Eurozone manufacturing PMI revised down to 45.1 from the flash estimate of 45.3. It’s an improvement from July’s 44.0 reading, but manufacturing nevertheless remains firmly in contractionary mode. This starts to bring PMIs into line with softer European economic sentiment data which point to a 1% GDP contraction in Q3.
*The UK PMI Manufacturing Survey rose from a downwardly revised 45.2 to 49.5. Consensus had looked for a rise to 46.1. However, at best the survey shows that manufacturing activity remains stagnant in what is otherwise a flat economy. While we believe that the 0.5% fall in Q2 GDP overstates the slowdown in the UK we expect that a technical bounce in Q3 will overstate the pace of growth. Put together, the UK should be seeing flat or slightly positive growth by the end of the third quarter.
Event Calendar:
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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