By Mike Jones
NZD
Waves of relief cascaded across global markets overnight in the wake of encouraging US data and the announcement of the ECB’s new bond buying scheme.
In tandem with the more upbeat global sentiment the NZD/USD has soared back above 0.8000.
The good news started with yesterday’s Australian employment data. Sure, August’s 8.8k decline in jobs was on the weaker side of expectations. But the coincident drop in the unemployment rate (to 5.1% from 5.3%) had the market rethinking the near 100bps of RBA rate cuts that had been priced in. Rising Aussie yields set the AUD/USD on a course higher, with the NZD/USD happy to head up to 0.7970 in pursuit.
Overnight, it was all about whether the ECB could walk the talk. They did (see Majors). As good cheer began to spread across markets, a bunch of surprisingly positive US data provided an additional kicker for risk sentiment.
Equity markets roared higher and our risk appetite index leapt from 63.5% to 68.6%. Against this backdrop, the ‘growth-sensitive’ NZD and AUD outperformed. The NZD/USD finished the night ½ cent higher around 0.8020, with NZD/JPY pushing up from 62.40 to almost 63.30.
For today, we wouldn’t be surprised to see the NZD/USD continue to squeeze higher. Speculative investors holding ‘short’ positions will no doubt be keen to square up ahead of tonight’s all important US jobs report. As well, the stalling of the NZD’s recent decline may elicit some hedging interest from the exporter community.
Topside NZD/USD resistance is eyed at 0.8045. A break above this level would pave the way for a retest of 0.8140. The only data of note set for release in the Asian time zone today is Aussie trade balance figures at 1:30pm (NZT). But with the NZD’s focus still offshore, these shouldn’t be particularly market moving.
------------------------------------------------------------------------------------------------------------------
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
------------------------------------------------------------------------------------------------------------------
Majors
The market got what it wanted from the ECB so equities, bond yields, and risk-sensitive currencies are all off to the races. The ‘safe-haven’ JPY has underperformed. However, losses in the USD were limited by strong US data.
OMG it’s the OMT. The latest acronym from the ECB is the Outright Monetary Transactions scheme, the new bond buying programme announced overnight. The details of the plan are pretty much as markets had expected following yesterday’s ‘leaks’. Investors took heart in particular from the fact the ECB’s bond purchases will be unlimited and will not be senior to private holdings.
Stock markets soared in response. European equity indices notched up gains of 2.1-3.4% as Spanish 10-year government bond yields fell below 6% for the first time since June.
US stocks are currently 1.7-2.1% higher and the VIX index (a proxy for risk aversion) has plunged from above 17.5% to around 16%.
The reaction in currency markets was more subdued. The ‘risk-sensitive’ AUD and NZD have been clear outperformers following the sharp rally in stock markets. But the GBP/USD and EUR/USD are only marginally above where they started the evening.
This likely reflects the support for the USD from a smattering of positive US data. The better than expected employment and services data has likely tempered expectations for QEIII from the Fed. Indicative of such, US 10-year bond yields have climbed almost 8bps to 1.67% and USD/JPY has rallied from 78.40 to around 78.90.
Looking ahead, we suspect easing Euro area stresses and refreshed risk sentiment will keep ‘risk’ currencies underpinned and see the EUR/USD continue to climb. The next layer of EUR/USD resistance is eyed at 1.2750.
In the short-term, the approach of tonight’s key US non-farm payrolls data may limit trading interest and encourage some near-term consolidation. Analysts currently expect a 130k gain in payrolls, although the ‘true’ consensus could be slightly north of this given the robust ADP figures overnight.
Other news:
*The ECB kept its main refinancing rate at 0.75% (confounding expectations for a 25bps cut) and confirmed that, under the OMT programme, it will be buy unlimited bonds of one to three-year maturity in secondary markets. The buying will be fully sterilised with conditionality requirements attached.
*The Bank of England left both its policy rate and asset purchase target unchanged at 0.5% and £375b respectively.
*US ADP employment increases 201k in August, above the 140k expected.
*US jobless claims 365k vs. 370k expected. US ISM non-manufacturing index jumps to 53.7 (from 52.6 in July), well above expectations of 52.5.
Event Calendar:
7 September: AU trade balance; UK industrial output; UK manufacturing production; UK PPIs; US non-farm payrolls.
No chart with that title exists.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.