By Kymberly Martin
NZD
The NZD/USD tried to push on higher on Friday night. However, it found resistance just above 0.8130, before returning to close the week at 0.8050.
NZ’s stellar Performance of Manufacturing Index release went almost unnoticed by the currency on Friday. May’s PMI reading of 59.2 was the highest since June 2004.
It is a significant lift from April’s already very solid reading of 55.2 and a world away from last year’s average of 50.9. The index also stands head and shoulders above its global peers. The JPMorgan World PMI stands at 50.6.
The NZD/USD traded below 0.8100 for most of Friday evening before launching an assault on the 0.81500 level early on Saturday morning. However, it fell short, returning to end the week around 0.8050.
The NZD showed similar trading patterns relative to its key European peers. It touched highs early on Saturday morning, before running out of steam and ending the day slightly below where it had started.
The NZD/EUR and NZD/GBP ended the week around 0.6030 and 0.5120 respectively.
The NZD/AUD that dabbled around the 0.8400 level on Friday has opened slightly higher this morning.
Near-term resistance remains at the 0.8460 level, however ultimately we see a higher cross as NZ fundamentals prove stronger than their cross-Tasman counterparts. We maintain an end-year NZD/AUD target of 0.8900.
Domestically, it is a busy week ahead, which we expect will support our view that the NZD is well underpinned by the strength of the NZ economy.
Data kicks off today with the PSI and the Westpac consumer confidence survey. The highlight will be Thursday’s Q1 GDP release. We are looking for a 0.6% expansion. This would be a good result following Q4’s heady 1.5% outcome.
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Majors
On Friday the JPY was the strongest performer. The AUD and NZD gave back a little of their recent rebound.
On Friday, recent JPY strengthening continued as the release of Bank of Japan Minutes showed that one policy marker favoured restricting stimulus to a two-year period.
It was far from the central view, but helped to feed the market’s current concerns that BoJ easing may prove as not as pervasive as they had originally assumed. The USD/JPY declined to finish the week around 94.30.
Elsewhere markets seemed a little tired at week’s end, against the backdrop of US data that was marginally softer than expectations.
Our risk appetite index (scale 0-100%) held on around 61%, having rebounded from mid-week lows around 55%.
European equities managed to record a 0.20% performance, but the S&P500 gave back half of its previous day’s gains, closing down 0.6%.
The USD index was on the ascendancy until the early hours of Saturday morning.
US data delivery was then slightly disappointing (May industrial production, 0.0% vs. 0.2% expected; June University of Michigan Confidence, 82.7 vs. 84.5). The USD index then declined to end the week around 80.70.
While the EUR/USD drifted slightly lower, to end the week close to1.3350, the GBP/USD was struggling to hold onto its recent gains. It dipped as low as 1.5620 on Friday night as data showed UK construction output declining 1.1% in April. It then managed to grapple its way back to finish the week at 1.5700.
The AUD rebound ran out of steam on Friday. The AUD/USD drifted off to close the week at 0.9570.
The most anticipated local even this week will be Tuesday’s Minutes from the RBA’s June 4 meeting. At the meeting the RBA reiterated that: rate cuts to date are working and further effects can be expected over time; the currency has fallen but is still high; and inflation gives it room to cut more if it needs to.
Currently, the market prices a further 40bps of rate cuts from the RBA in the year ahead. However, the Minutes may prove unrevealing, as the RBA’s next decisions likely remain very dependent on data delivery in coming weeks/months. Our NAB colleagues, do however, see prospect for a further 25bps cut before year end.
Tonight, EU employment data, the US Empire Manufacturing index and NAHB house price data will be released.
However, the highlight of the week for markets will be the US FOMC meeting early Thurs morning (NZT).
Bernanke’s comments a few weeks ago helped set off the recent reduction in global risk appetite and shift higher in US bond yields.
The last thing the Fed would like to see at this point is a surge higher in long yields or a ‘collapse’ in risky assets. Chairman Bernanke may therefore take this week’s opportunity to try to soothe market worries. He may emphasise that talk of ‘tapering’ of asset purchase, is still a long way from rate hikes. These remain on the distant horizon in 2015, or beyond.
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