By Mike Jones
NZD
After marching higher last week, the NZD has started this week on the back-foot. Risk-sensitive assets lost a little of their lustre overnight, as the post QE3 hangovers set in.
Global equity markets gave up a little of last week’s gains and our risk appetite index (scale 0-100%) eased from almost 78% to around 77%.
Against this less buoyant global backdrop, the ‘risk-sensitive’ NZD/USD shed around ½ cent overnight as investor trimmed short positions in the USD.
Nonetheless, the NZD/AUD managed to forge a path higher, continuing the trend of the past few weeks. The cross currently sits at 5-month highs around 0.7890.
Media chatter and rhetoric suggesting an October RBA rate cut is likely continues to weigh on Australian interest rates and the AUD.
The market is currently pricing a 50/50 chance of such, so there is certainly potential for more AUD weakness, and NZD/AUD gains, if the RBA does deliver a cut on October 2.
However, while the risk of a cut is probably rising, our NAB colleagues remain of the view October could be too soon. As a result, a sustained break above 0.7950 may be a bridge too far for the NZD/AUD in the short-term. We’ll be keeping an eye on today’s September RBA Board minutes as a cross-check on this view.
For the NZD/USD, we note that NZ-US interest rate differentials (one of the key ‘fundamental’ drivers of the NZD/USD) haven’t accompanied the currency’s recent push higher.
So we wouldn’t be surprised to see the NZD/USD continue to drift lower into this week’s important domestic data – the current account balance and dairy auction tomorrow, and GDP on Thursday.
For today, initial support for the NZD/USD is expected around 0.8230. Resistance will be encountered on bounces towards 0.8310.
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Majors
After spending the past few days revelling in QE3-inspired euphoria, risk sensitive assets paused for breath overnight. Equity markets lost ground, commodity prices declined (sharply in the case of oil), and traditional ‘safe-haven’ assets enjoyed a bit of rare support.
In keeping with the mild ‘risk-off’ tone, most of the major currencies ended the session a shade lower relative to the USD. The ‘commodity-sensitive’ AUD underperformed.
Aside from the struggling AUD, the JPY was one of the biggest movers of the (admittedly lacklustre) session. USD/JPY leapt from 78.40 to above 78.80 in New York trade, to be almost 2% above Thursday’s 77.50 lows.
In large part, the softer JPY reflects growing speculation of action from the Bank of Japan tomorrow. Not only is the gloss starting to come off the Japanese economy, but the JPY is riding high again following last week’s Fed easing.
As a result, pressure is mounting on the BOJ to do something to lower the JPY and rescue the economy. Possible options available to the BoJ include abolishing the yield floor for long-dated bonds, purchasing foreign bonds, an increase in the size of its asset purchase programme, and/or direct intervention to lower the JPY.
Of these, we suspect a ‘shock and awe’ type increase in the BoJ’s asset purchase programme stands out as the most likely candidate to get the JPY sustainably lower.
We continue to expect the trend deterioration in Japan’s current account position to gradually undermine JPY strength, but have revised our USD/JPY forecasts down to show little change from current levels through to end-2012 (December forecast – 76.00).
Other News:
* The Shanghai Composite stock index slides more than 2% as Chinese growth concerns flare up once again.
*US Empire Manufacturing index disappoints in September, falling from -5.85 to -10.41 (-2.00 expected).
*Spanish 10-year bond spreads to German bunds rise almost 25bps, capturing a bit of attention.
Event Calendar:
18 September: CH property prices; AU RBA minutes; AU RBA’s Debelle speaks; UK CPI; EU German ZEW; US Fed’s Dudley and Evans speak; 19 September: NZ dairy auction; NZ currency account; JN BoJ decision; UK BoE releases minutes; US housing starts; US building permits; 20 September: NZ GDP; CH HSBC Flash manufacturing PMI; EU European PMIs; UK retail sales; US jobless claims; US Philadelphia Fed index; US more Fed speak; 21 September: NZ net migration; NZ credit card billings.
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