By Kymberly Martin
NZD
In the backdrop of broad USD weakness in the early hours of this morning, the NZD/USD has bounced to sit around 0.8030 currently.
What was looking like a fairly mundane night for currencies burst into action early this morning. Against the backdrop of broad USD selling the NZD surged from below 0.7950 to touch above 0.8100.
Subsequently, as markets have simmered down, it has returned to sit around 0.8030.
The fate of the NZD/USD tonight will be determined by the long-awaited US payrolls report. The market has already reduced USD positions in anticipation of possible weakness in the data.
An outcome even close to consensus expectations (163K) could therefore see the USD bounce at the expense of the NZD and others.
However, there is still plenty of potential for a very weak payrolls number to extend USD weakness. Risk appetite would be negatively impacted in this scenario.
This suggests the NZD would not broadly outperform, but would likely outperform a declining USD. Key support for the NZD/USD remains in the 0.7900-0.7940 window, with resistance eyed above 0.8100.
The NZD underperformed relative to its key European peers overnight. The NZD/GBP, at 0.5150, is now at its lowest level since early January.
The NZD/EUR sits at its lowest level in a year, at 0.6070.
There is little in the way of crucial data releases locally or in Europe tonight, with all eyes firmly on US payrolls.
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Majors
It has been a morning of fairly high drama for markets, with the USD the primary loser, and the JPY the strongest performer.
The evening started quite quietly across most markets. Around midnight (NZT) the ECB announced that rates remained on hold at 0.50% as widely expected.
The ECB reiterated it stands “ready to act”, whilst downgrading its GDP forecast for 2013 from -0.5% to -0.6% and nudging its 2014 forecast higher to +1.1% (+1.0% previously).
Inflation forecasts for this year and next, at 1.6% and 1.4% respectively, remain well below the ECB’s 2% price stability ceiling. However, going into the meeting the risk had been for even lower inflation numbers.
The EUR/USD began an ascent post the ECB announcement. It later pushed on through key resistance levels to trade at 1.3250 currently, close to its highs since mid-February.
The USD also came under severe selling pressure as the USD/JPY broke through a key technical support level.
The USD/JPY moved rapidly from above 99.00 to below 96.00, before crawling back to 97.20 currently.
Downward pressure on the USD was exacerbated by positioning ahead of what the market now anticipates will be a soft US payrolls number tonight.
Overall, the USD index declined from above 82.50 early this morning to almost 81.00 (its lowest level since late February). It has recovered to trade around 81.50 currently.
The GBP was also a key beneficiary of USD weakness, as the Bank of England left rates and asset purchases unchanged. Governor King completed his final meeting at the helm without fanfare.
The GBP/USD rose from around 1.5450, before finding resistance above 1.5680. It sits around 1.5610 currently.
Despite a generally negative attitude to risk, the AUD and NZD outperformed the beleaguered USD.
European equity markets closed down 1-2%, our risk appetite index (scale 0-100%) fell to 59%, and corporate credit spreads widened.
However, the AUD benefitted from the broad USD selling, surging from below 0.9500 to above 0.9670, currently trading around 0.9620.
The highly volatile and skittish behaviour of markets overnight shows just how sensitive it is as we approach tonight’s US payrolls data. An expectation of a soft number is likely now in the price.
An outcome even close to official consensus (163K) could therefore see a bounce in the USD and US bond yields. However, a very significant disappointment could yet take a further toll on the USD.
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