By Mike Jones
NZD
The NZD has been amongst the strongest performing currencies in a volatile and messy overnight trading session.
After sliding to 8-month lows close to 0.8000, the NZD/USD quickly bounced back to 0.8150 where it opens this morning.
Globally, asset market volatility has picked up in recent weeks as uncertainty and worries about the timing of the Fed’s exit from its QE policies have beset markets.
Trading ranges have widened. One-month NZD volatility (a key input into options pricing) has jumped from below 8% in April to above 12%.
Asian equity markets yesterday copped an absolute hiding. The Nikkei lost over 7%. This, along with a worrying decline in the HSBC Chinese PMI, kept the NZD on the back foot through the early evening.
But the currency staged a sharp reversal later in the night as speculative investors scrambled to square up large long positions in the USD.
Broader NZD sentiment was also bolstered by heavy NZD/AUD demand.
The slump in China’s PMI and Ford’s decision to pull out of Australia after 90 years certainly didn’t do the lucky currency any favours. Investors’ preference for the relatively brighter fundamental outlook of NZ pushed the NZD/AUD to fresh 4-year highs above 0.8360 overnight.
NZ-AU interest rate differentials also increased as markets ratcheted up RBA rate cut expectations again. As a result, the ‘fair-value’ range of our short-term NZD/AUD valuation model has nudged up to 0.8100-0.8300.
For today, NZ trade balance figures at 10:45am are expected to show a monthly surplus of $565m, good enough to reduce the annual deficit a bit (market expectations $515m). We doubt the trade figures will trouble the NZD though. For now, NZD/USD direction is being mostly dictated by the USD.
The fact that even the Fed’s influential dovish members are now actively talking about tapering should help the USD establish a base of support, in our view. But it would be a mistake to assume the USD is about to move steadily higher, and in a straight line.
The likelihood the US economy has to negotiate one or two more soft patches on its way towards a self-sustaining recovery means we still expect the NZD/USD to hold up in an elevated range this year. It might just be that this range is more like 0.7500-0.8500 than the 0.8000-0.9000 range that looked likely 3-4 months ago.
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Majors
Financial markets remain in a skittish and volatile state as the dust settles from yesterday’s Bernanke testimony.
Currency markets have been tossed around in wide ranges, seemingly as investors re-position after the Fed. ‘Fundamentals’ have taken more of a back seat.
Having been shaken-up by suggestions Fed tapering could take place in coming months, investor confidence was further rattled yesterday by the indubitably soft HSBC China Flash PMI (49.6 vs. 50.4 expected).
Rising risk aversion produced sharp declines in Asian equity markets, most notably a 7.3% plunge in the Nikkei.
Another spike in JGB yields was partly to blame as Japanese bank stocks suffered (banks hold large amounts of JGBs).
Equity market weakness soon fed through to Europe, where the major indices notched up declines of around 2%. A more encouraging-than-expected set of European Flash PMIs (for May) did little to prop up the dour mood.
Movements in currency markets have been a bit of a mish-mash, with speculative flows and positioning responsible for much of the volatility. The USD has given up a portion of yesterday’s Fed-inspired gains.
Overnight comments from the Fed’s Bullard and echoed by the WSJ’s Hilsenrath that Fed is still some way off winding back QE may be partly responsible. The failure of 10-year US bond yields to push on past 2.05%, despite some positive US data, may have added to investors’ bias to trim USD longs.
USD/JPY has led the losses, sliding from 103.50 to almost 102. USD/CHF has also come off the boil sharply, while the EUR, AUD, and NZD have each strapped on gains of more than a cent against the USD.
Looking ahead, markets may get a chance to pause for breath tonight, with just US durable goods and the German IFO on the agenda. The consensus expects an unchanged IFO from last month (104.4). An increase, as is the risk, could see the EUR/USD again flirt with resistance around 1.3000.
Other news:
*UK Q1 GDP was confirmed at 0.6%y/y.
*The flash manufacturing PMI for the Euro Area rose 1.1 points to 47.8 in May (47.0 expected), with gains in both Germany (49.0 from 48.1) and France (45.5 from 44.4). While the improvement is welcome, the indices still imply that EZ GDP growth could contract in Q2 for a seventh consecutive quarter.
*US data continues to positively surprise – jobless claims 340k (vs. 345k expected) and new home sales +2.3%m/m (vs. 1.9% expected)
Event calendar:
24 May: NZ trade balance; US durable goods orders; EU German IFO.
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