by Mike Jones
NZ Dollar
The NZD/USD barely budged overnight, despite most G10 currencies feeling the pinch of a broad-based strengthening in the greenback. It opens this morning around 0.8190.
NZD/AUD buying largely squares the circle of the NZ dollar’s outperformance. Local swap yields continued their strong run yesterday, rising 2-3bps to fresh 2½ highs in the case of the two year.
As a result, NZ-AU 3-year swap differentials widened from 69bps to 76bps, further bolstering ‘fundamental’ support for the cross. Macro and leveraged buying dragged NZD/AUD up to a fresh high of almost 0.8990 overnight.
As we noted yesterday, positive momentum (our momentum model is long from 0.8850) and the daily close above previous resistance at 0.8925 means a further climb to 0.9000 looks to be on the cards for the NZD/AUD.
This is a risk we have long flagged. We expect the cross to remain above 0.8800 for all of 2014.
Overnight currency movements weren’t particularly noteworthy. A dearth of news meant the weekend’s Iran nuclear deal has been written up as responsible for most of the price action. The biggest mover was a near 0.5% rally in USD/JPY, the upshot of which is a stronger NZD/JPY (currently around 83.40).
For today, the Australasian data calendars are empty. But there will be some attention on a speech from RBA Deputy Governor Lowe at 11;15am (NZT). We doubt there will be anything particularly new for traders to get their teeth into though. The NZ data schedule kicks off tomorrow with the October trade balance and weekly mortgage approvals figures.
On the day, expect more choppy sideways trading inside 0.8180-0.8225 for the NZD/USD. We may have to wait for Thursday’s (no doubt buoyant) ANZ business survey for another topside probe in NZD/AUD.
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Majors
Broad USD strength, kick-started by aggressive USD/JPY buying, has been the story of the night. With the exception of the SEK, the USD has strengthened against all of the major currencies.
The newswires are crammed full of stories about the market effects of the weekend’s deal to curb Iran’s nuclear programme. The most direct impact has been on oil prices, with the front NYMEX contract selling off around 1% (to US$93.90/barrel) overnight.
Easing geopolitical risks have also provided a prop for stock markets. US stocks have managed gains of 0.1-0.2% following slightly larger increases across European bourses (EuroStoxx 50 +0.6%).
In currency markets, USD/JPY captured the most attention, bouncing from 101.20 to almost 102.00. This was despite disappointing US pending home sales figures (-0.6%m/m vs. +1.0% expected) and a modest pullback in US bond yields (10-year 2.73%).
While some are attributing the rally in USD/JPY to a reduction in ‘safe-haven’ demand for the JPY, we suspect stop/loss and technical buying was more of a factor. All eyes are now on the May high of 103.80. While momentum is certainly on USD/JPY’s side, overweight positioning means a push up to this level will be a struggle in the short-term.
The higher USD/JPY did pave the way for broader USD gains. GBP/USD and EUR/USD both lost around 0.4%, with the weakness in the latter no doubt amplified by more dovish comments from the European Central Bank. The ECB’s Hansson said the Bank still has room to cut rates, and there are “all kinds of other measures that are still on the table”. Asmussen echoed these sentiments, saying the ECB could take further action if “conditions demanded it”.
Against this backdrop, investors will be looking to Thursday’s November EZ CPI to see if October’s shock weakness was a one-off or indicative of growing European deflation risks. If it’s the latter, we can expect EUR weakness to gather pace later in the week.
Today/tonight, attention will shift back to the UK, where the BoE brains trust are testifying before the UK Treasury Select Committee. Expect Governor Carney to restate the BoE’s commitment to forward guidance.
However, as we have seen recently, this has to be believable to engineer a weaker GBP. So far, this hasn’t happened.
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