By Mike Jones
NZD
Despite plenty of positive commodity price news, the NZD is languishing at the bottom of the overnight currency performance tables.
A broad strengthening in the USD did the damage, knocking the NZD/USD below 0.7950 for the first time since mid July.
According to yesterday’s ANZ index, world prices for NZ’s commodity exports bounced a bit in August. The 0.5% monthly gain was the first increase in seven months. Year-on-year growth in world prices appears to be bottoming around -16%. We anticipate further improvement ahead.
The commodity price good news continued this morning with the latest GDT dairy auction. The 6% gain in average dairy prices offers a lot of support to Fonterra’s new payout forecast. Importantly, the trend in prices appears to have turned higher, supported by drought conditions in the US. This is consistent with the view we have been espousing for a while. Average global dairy prices are now 23.3% above their mid-May lows.
However, none of this seemed to matter for the NZD. Instead, a sell-off in the NZD/AUD following yesterday’s RBA meeting, and a broad strengthening in the USD overnight, have conspired to drag the NZD/USD ½ cent lower.
The RBA left the cash rate at 3.5% as expected. The tone of the statement was broadly neutral, and little changed from last month. However, it was slightly more hawkish on the domestic economy. The RBA had plenty of positive things to say about domestic activity, but virtually no negatives. It certainly provided a contrast to the tidal wave of bearish AUD commentary sloshing around in the media at present. The AUD/USD leapt from 1.0230 to 1.0280 in response, sending NZD/AUD back down to around 0.7750.
The focus for the NZD today will remain across the ditch with Australia releasing Q2 GDP. Our NAB colleagues expect a very respectable 0.9% quarterly gain, above the 0.7% expected by the consensus. A result around here would likely keep the downward pressure on the NZD/AUD. Near-term support is eyed around 0.7730.
Yesterday we suggested a test of 0.7930 support for the NZD/USD looked likely. Having bounced off this level overnight, we hold an upside bias for the currency today. Moreover, this morning’s strong dairy price auction may see the NZD crosses begin to outperform.
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Majors
A bout of ‘safe-haven’ buying has seen the USD strengthen against most of the major currencies overnight.
A dismal night in global equity markets provided most of the direction. While US stocks are broadly flat, European equities are a deep shade of red. The major indices closed down 1.1-1.6%. Not only did ratings agency Moody’s revise the outlook on the European Union to negative, but some weak car sales data weighed heavily on European auto stocks.
Consistent with the sell-off in equity markets, the VIX index climbed from 17.5% to almost 19%, indicative of investors’ reduced tolerance for ‘risk’. Against this backdrop, investors trimmed positions in the EUR and risk sensitive currencies in favour of the USD. The EUR/USD slipped from 1.2620 to 1.2560 and GBP/USD headed back below 1.5900.
The disappointing US ISM manufacturing survey briefly halted the ‘buy USD’ theme. The headline index fell to 49.6 (50.0 expected), the third consecutive reading below 50.0, and the lowest since July 2009.
Investors’ immediate response was to ditch the USD, with the ISM report underscoring the view further monetary stimulus is warranted from the Fed. USD/JPY briefly skidded below 79.30. But safe-haven buying eventually triumphed in underpinning the USD.
Looking ahead, the approach of the all important ECB meeting on Thursday night may limit trading interest over the next 24 hours. In addition, tonight’s UK and EU services PMI and EU retail sales figures shouldn’t ruffle too many feathers. For the EUR/USD, more consolidation inside the familiar 1.2550-1.2635 range looks likely for today. Heading into the ECB meeting, we are wary of the EUR downside if Draghi holds back on targets for peripheral yields. But, big picture, we are still constructive on the EUR/USD and expect any near-term dips to be limited to 1.2435-65.
Other news:
*European PPIs print above analyst expectations in July (1.8%y/y vs. 1.6% expected), suggesting price pressures are not rapidly fading.
*UK construction PMI dips to 49.0 in August, from 50.9 in July (50.0 expected). US construction spending disappoints in July (-0.9%m/m vs. +0.4% expected).
Event Calendar:
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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