By Kymberly Martin
NZD
The NZD/USD opened lower on the week and has spent the past 24-hours crawling its way back to 0.7900.
There was little on the domestic agenda to influence the NZD/USD yesterday, as it dabbled around the 0.7850 level. In more stable markets overnight it crept higher to sit around 0.7900 currently.
Coinciding with the recent plunge in the NZD/USD, IMM speculative positioning data shows net long NZD positions have plummeted. This is similar, though not as extreme, as moves seen in AUD positioning, that are now outright short.
This cautions against taking on a very bearish NZD view at this point. Rather, we would be looking for a bounce in the currency.
We have recently revised down our end of year NZD/USD target to 0.8300 (from 0.8500 previously).
Our key premise that the NZD remains well supported by domestic fundamentals (growth and interest rate differentials and NZ commodity prices) remains intact.
However, as the market has inched forward its expectations for the tapering of US QE, demand for the ‘risk sensitive’ NZD has been reduced. In addition, the prospect of greater currency volatility reduces the appeal of ‘carry trade’ currencies such as the NZD.
For today, crucial NZD/USD support remains at 0.7800. Resistance is eyed in the 0.7930-0.7950 window.
The NZD was attempting to find its footing relative to its European peers overnight, after its recent inelegant slide against the EUR and GBP.
The NZD/EUR found support at the 0.5920 level, just short of level that marked its trough in May last year. Having touched 0.5990 early this morning it currently sits at 0.5960.
The NZD/GBP found support at 0.5040 yesterday, trading as high as 0.5090 in the early hours of this morning, before returning to trade at 0.5070. The fate of this cross this evening will likely be influenced by the release of UK manufacturing data.
There is little on the domestic agenda today to influence the NZD, so general risk appetite will remain a dominant driver. The outcome of today’s Bank of Japan meeting will likely be instrumental in setting the tone.
It will also set the tone for the NZD/JPY that has bounced from 76.50 to 78.00 over the past 24-hours. Longer–term we continue to see the NZD/JPY uptrend resuming.
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Majors
After Friday’s volatility, markets started the week in consolidation mode. The JPY was the key underperforming currency.
In a data-light evening, markets consolidated after the high dramas of last week. Equity markets were fairly flat. Our risk appetite index (scale 0-100%) recovered a little to 66%. The USD index paddled sideways around the 81.80 level, before slumping a little to 81.60 this morning.
The smattering of European data overnight showed some hope for France, but confirmed Italy remains locked in recession. The final reading of Italian Q1 GDP showed GDP fell 0.6% in the quarter to be down 2.4%y/y.
In addition, Italian industrial production declined 0.3%q/q in April, suggesting the outlook is not about to improve any time soon. Signs from France were more encouraging. Industrial production rose 2.2%q/q in April.
The EUR/USD took the data in its stride bobbing around the 1.3220 level for much of the night, before creeping higher to 1.3260 this morning.
While most currencies trade fairly tight ranges overnight, the JPY was noticeably weaker. The USD/JPY traded from around 98.00 to around 99.30 before slipping back to 98.50 currently.
The weakness in the JPY was consistent with its strong negative correlation to the Nikkei equity index that rebounded 5.0% yesterday. Yesterday, the final reading of Japanese Q1 GDP showed growth of 0.6%q/q, while inflation continued to decline at 1.1%y/y.
Today, all eyes will be on the Bank of Japan as it announces interest rates. The market will focus on the balance between ongoing stimulus from the Bank of Japan and pro-growth polices from PM Abe.
The AUD/USD managed to find support at the crucial technical level of 0.9400 overnight, to trade at 0.9460 currently.
As Australia returns from its Queen’s Birthday holiday today, the domestic data highlight will be the NAB business confidence survey. Last month’s reading showed a slight tick-up in April to -6, from a four year low of -7 in March. A further improvement would be welcomed by the market and the RBA.
Tonight, UK industrial production data will be released. As shown by recent PMI data, the manufacturing sector in the UK stands in better shape than its Eurozone counterparts. Consensus is looking for improving momentum in IP. A -0.6%y/y reading is expected in April after a previous reading of -1.4%.
The GBP/USD consolidated around the 1.5540 level overnight before moving higher to 1.5580 this morning.
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