by Mike Jones
NZ Dollar
Offshore markets have once again taken an axe to the kiwi. But, contrary to the pattern observed over the past fortnight, the NZD/USD hasn’t bounced off key support around 0.8180/90. In other words, the currency looks to have broken lower. It currently trades around 0.8130.
Broad USD strength and commodity price weakness were the architects of the kiwi’s demise. A string of upbeat US economic data overnight bolstered hopes next week’s payrolls/ISM combo will print strong enough for the Fed to taper QE in December.
At the same time, generalised commodity price weakness (oil down 1.9%, broader CRB index down 0.6%) sapped demand for the ‘commodity currencies’ – AUD and CAD included.
The NZD/USD slipped from above 0.8200 to two month lows around 0.8130. The fact it seems to have broken below important technical levels may encourage additional selling from speculative and momentum-type accounts today.
However, we’d caution against getting too bearish. First, speculative appetite to buy NZD/AUD should continue to provide a prop for the NZD more generally. The cross has continued to flirt with 0.9000 over the past few days (high of 0.8997 yesterday). A break through this level would only reinforce the uptrend.
Second, local data continues to paint a picture of an economy building a head of steam. Yesterday’s trade figures revealed a much smaller than expected October deficit ($168m vs. $350m expected) as exports shot up 23%y/y. Today’s ANZ business survey should continue the buoyant economic theme. It already points to GDP growth of around 5%. We wouldn’t be surprised to see the index hit fresh highs today (released at 1pm NZT).
On the day, there is weak support for NZD/USD around 0.8130. We doubt a move below 0.8100 will be seen. Initial resistance will be encountered on any bounces to 0.8225.
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Majors
After spending most of the night dribbling lower, the USD staged a noticeable rebound early this morning. This has taken the edge of most of the major currencies, with only the GBP bucking the stronger USD trend. Admittedly, price action has been somewhat lacklustre as volumes thin out ahead of tonight’s US Thanksgiving holiday.
A late sell-off in US fixed income markets looks to have been the trigger for the USD rally. 10-year US Treasury yields popped from 2.71% to almost 2.76%. This followed a string of US economic that was, on balance, a touch stronger than market expectations.
October durable goods orders matched expectations for a 2%m/m decline. But investors were interested in the drop in November 23 jobless claims figures (316k from 323k, 330k expected) and a surprise bounce in the University of Michigan consumer confidence survey (75.1 vs. 73.1 expected). An encouraging November read of the Chicago PMI also buoyed hopes next week’s ISM manufacturing index will remain strong.
Continuing the trend of the past week, USD gains were most marked against the JPY. Indeed, USD/JPY was dragged up to a fresh 6 month high above 102.00. We think the rally could extend as far as May’s 103.80 highs as long as next week’s top tier US data (payrolls and ISM manufacturing) behaves itself.
The commodity currencies (CAD, AUD, and NZD) all suffered at the hands of the stronger USD, despite what was a fairly upbeat night for risk sentiment. The main global equity indices all notched up modest gains (S&P500 +0.2%, EuroStoxx +0.7%) and risk aversion indicators such as the VIX have generally eased. However, a rough night for global commodity prices certainly helps square the circle.
In contrast, the GBP and EUR managed to outperform, the former seemingly thanks to the confirmation of Q3’s 0.8%q/q increase in UK GDP. The EUR, meanwhile, found some support from news that the main German political parties have finally cobbled together a government.
The announced Grand Coalition is comprised of the CDU/CSU and SPD, as expected. However, an SPD referendum still needs to pass in early December before Merkel can begin her third term as Chancellor.
Tonight, the focus will be on the November Eurozone CPI, with investors keen to see if October’s shock weakness was a one-off or indicative of growing European deflation risks. Market expectations are centred on 0.8%y/y. Anything less would fan speculation of additional ECB policy easing and take a heavy toll on the EUR. Initial EUR/USD support will be found on dips towards 1.3515.
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