The immediate direction for the NZD could be determined by the upcoming GDT auction, especially if prices fall again

By Raiko Shareef

NZ Dollar

The NZD slid lower along with its peers on Friday in a risk averse market. NZD/USD posted a 0.7% loss to close at 0.7820.

NZD/USD resisted multiple challenges of the 0.7800 level on Friday.

But with the market’s mind firmly on a waning global growth story (and the USD wont to rise in that environment), we doubt that level will hold for much longer.

The AUD fell the hardest on Friday, seeing the NZD/AUD cross gain 0.5% to close almost exactly on 0.9000.

We can see a case for the cross to rise further, as AUD remains more exposed to slowing in the industrial sectors of China’s economy. We still pick 0.89 for the cross by year-end.

The JPY’s outperformance in the risk negative environment has seen NZD/JPY lose 0.8% to sit just above 84.0 this morning. We had regarded this as the likely bottom end of the range.

Should market sentiment steadily worsen, we envisage a slow decline toward 83.0. Note that during the emerging market’s rout early this year, this highly risk-sensitive cross briefly dropped below 82.0.

This week, NZ watchers will be focussed on the GDT auction, the results of which will be released in the wee hours of Thursday morning. After the -7.0% decline last time, another significantly negative result will have NZD/USD testing the 0.7700 low for 2014.

Today, we mark initial support at 0.7780, and resistance at 0.7870.

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Majors

For the second night in a row, currencies played second fiddle to the negative price action in equity markets. Amid the pessimism, the USD found a safe-haven bid, with the Bloomberg Dollar Spot Index gaining 0.4%. The JPY stamped its safe-haven credentials by being the only major currency to gain against the USD.

Equity markets were a veritable sea of red on Friday, with benchmark indices on both sides of the Atlantic down sharply. The S&P 500 lost 1.2%, while the Euro Stoxx 50 is off by 1.7%. The latter sits a whisker above its 200-day moving average, the first time that technical support has been tested in nearly two years. The VIX ‘fear’ index hit 22.2 on Friday, its highest since 2012.

The driver remains growing pessimism about the outlook for global growth. Rather than fresh data, though, it is the multitude of policymakers expressing ‘concern’ about the prospects for the euro-zone/Japan/China that is fuelling the poor sentiment.

Of the comments made over the weekend at the IMF/World Bank annual meeting, Stanley Fischer’s will likely get the most airtime at the open this week. The Fed Vice Chair noted that “if foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise.”

ECB President Mario Draghi maintained a now-familiar downbeat demeanour, saying that he fears the euro-zone slowdown may postpone investment decision by firms and households. Still, he refused to be drawn into confirming that sovereign bond purchases will be required.

In the currency space, the gravitational pull of the USD was evident in the reaction to Canada’s employment report. There, employment jumped by 74.1k, against expectations for a 20k gain. The details were strong, with full-time jobs accounting for 69.3k of that. Despite this punchy outturn, CAD lost 0.1% against the USD on the day, to 1.120.

But should the strong element of risk aversion in markets suddenly dissipate, we would return to being cautious (but still bullish) on the USD. Speculative positioning now shows signs of stretched, with net USD longs rising to 306k contracts, according to CFTC data. This is rapidly approaching the high-water mark of 350k, hit during last year’s taper tantrum.

This week, expect investors to remain on edge about further signs that the pace of global growth is slipping. With that in mind, there is plenty of data on offer, including Chinese trade (due today), Japanese industrial production, and Germany’s ZEW survey.

The speaking circuit for central bankers seemingly never sleeps, with the usual assortment of Fed hawks and doves scattered through the week. Notably, Fed Chair Yellen steps up to the podium on Friday night. But given that she is addressing a conference on inequality, she may well steer clear of making any controversial noises on monetary policy.

Other news:
* AU home loans for August -0.9% m/m vs +0.2% expected

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