By Mike Jones
NZD
The NZD/USD has spent the past 24 hours consolidating in a 0.7920-0.7955 range.
The more interesting trends have been in the crosses, with NZD/EUR selling broadly offsetting a stronger NZD/AUD.
Yesterday’s disappointing Australian Q2 GDP figures set the NZD/AUD up for a strop higher overnight.
The 0.6%q/q expansion wasn’t far south of the 0.7% expected, although underwhelming consumption growth (0.6%) looks to have exacerbated the downside surprise.
In the wake of the data, NZ-AU interest rate differentials continued their increasing trend, supporting a push up to nearly 0.7800 in the NZD/AUD. NZ-AU 3-year swap differentials have now climbed from -76bps to -40bps over the past fortnight.
This underpins the 0.7850-0.8050 ‘fair-value’ range suggested by our short-term NZD/AUD valuation model.
Overnight, investors’ attention was squarely focused on the ECB’s bond buying plan, and hopes it can rescue the sovereign borrowing programmes of Spain and Italy. Leaked details of the plan spurred a mild short covering rally in the EUR/USD and EUR crosses.
As a consequence, the NZD/EUR slipped from above 0.6340 to around 0.6300, helping limit NZD/USD gains to around 0.7955 overnight.
We’ve noted previously that NZD/EUR looks to have peaked around 0.6650. A further squaring of EUR short positions means a break below the 200-day moving average at 0.6230 looks likely in coming sessions.
Looking ahead, last night’s cautious improvement in risk appetite reinforces our view NZD/USD support at 0.7920/30 should hold in the short-term. Gains should be limited to around 0.7990 ahead of tonight’s all important ECB meeting.
Watch out for today’s Australian employment figures at 1:30pm (NZT). These can be volatile. There is no data due for release in NZ.
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Majors
Financial market sentiment brightened overnight, as ‘leaked’ details of the ECB’s bond buying plan hit the market. However, rather than a broad improvement in risk appetite, this was mostly reflected in a short covering rally in the EUR/USD and EUR crosses.
The EUR and risk sentiment actually started the night on the back-foot, following some uninspiring Chinese and European services PMI figures (see below). European equities opened lower and the EUR/USD slipped from above 1.2560 to around 1.2500.
But the data was soon forgotten as investors latched onto leaked details of the forthcoming ECB bond buying program.
Rumours also flew around about coordinated global central bank action to accompany the ECB’s stimulus plan. But this was probably a good example of the market getting carried away.
From around 1.2500, the EUR/USD was launched to almost 1.2600 as Spanish and Italian sovereign spreads narrowed sharply on the news. Equity markets recovered their early losses to finish the night around flat. For risk currencies like the AUD, CAD, and NZD, heavy selling of AUD/EUR, CAD/EUR, and NZD/EUR offset any improvement in risk appetite, such that most finished the night lower. Indeed, the AUD and CAD were the night’s clear underperformers.
From here, all eyes are on tonight’s ECB policy meeting. Whether the overnight improvement in sentiment can be retained likely rests on ECB chief Draghi confirming unlimited, sterilised bond purchases are indeed part of the plan. We also expect a 25bps cut in the ECB’s refi rate, but this should be less of a focus. We still think the EUR/USD can extend its gains and look for a break above 1.2640 resistance in time.
Other news:
* According to the ‘leaks’, the ECB is planning unlimited sterilised government bond purchases of up to three years. The ECB would likely waive seniority status, but it is not setting yield caps. Conditionality is likely and the ECB would consider selling bonds to enforce this.
* Eurozone service sector activity proved weaker than anticipated in August. The aggregate Eurozone services PMI declined from 47.9 to 47.2 (47.5 expected), its weakest reading since May 2012. This hardens our expectation the Eurozone is poised to enter recession in the third quarter.
* Chinese HSBC PMI slips from 53.1 to 52.0 in August. *Eurozone retail sales -0.2% in July, as expected.
Event Calendar:
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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