Global stock gains boost New Zealand dollar

Tuesday marked a reasonably volatile day of trading for the New Zealand dollar (NZD) both during local hours and the offshore trading sessions.

A string of positive earnings results from the US, released after the Monday close, provided the initial catalyst for a break higher in the NZD. On Tuesday, however, the bird remained trapped beneath 0.7150 during the NZ time zone, a key resistance level that has marked the upper end of the range for the last 2 months.

The 1.2% increase in June’s NZ food prices was not strong enough to lift our Q2 CPI expectation for Friday (still 0.3%). However, in conjunction with only a small fall in Australian business confidence yesterday, it was enough to underpin the NZD-AUD cross rate and provide support for a move up towards 0.8150 as both the NZD and the AUD drifted lower against the USD for the remainder of the day on Tuesday.

Having dipped below 71 cents for a brief period as London woke on Tuesday, and testing support around 0.7080, the fate of NZD continued to follow risk sentiment and global equity markets. US equity markets rallied strongly with gains of 1.5 – 2% as investors were encouraged by Monday’s positive corporate earnings results.

The gains in global stocks provided impetus for the NZD and the AUD to push higher overnight, the NZD topping out around 72 cents having broken through resistance around 0.7150 and the AUD climbing back up over 88 US cents. Locally today we have retail sales results for May due out at 10:45am which will be worth noting (even though we already know from the broader Electronic Transactions that spending remained tepid into June).

For the record, we’re picking an unspectacular retail advance of 0.8% (consensus 0.5%) overall, and 0.6% ex-auto. While the retail data may provide some short-term direction, with attention focussed on US corporate earnings, and the overnight boost in risk appetite, expect the NZD to trade with a positive bias, and be well supported on dips back to the low 71’s.

Majors

After a fairly subdued overnight session, which had seen AUD/USD extend its stay on the same big figure (0.87) to more than 60 hours, and NZD/USD moving within a 100 pip range for the entire same period, European trading began in lacklustre fashion.

Equities opened fairly flat, with stock futures moving into the red on the news Moody’s downgraded Portugal from Aa2 to A1. There were also media reports of a little known Chinese ratings agency (Dagong) – a putative rival to the better known global Big Three – downgrading Western sovereign ratings and accusing its Anglo-Saxon competitors of ideological bias in favour of the West. With this, the euro was initially pressured, falling to a low of 1.2523; its weakest since 6 July.

The bout of selling also took its toll on EUR/GBP which, having rallied over the past two weeks from 0.8068 to 0.8325, began to fall on model-driven selling, with the move accelerating on a fall below trendline support at 0.8355. This triggered stop-loss orders as 0.8350 was broken on the downside. With UK CPI coming in slightly above expectations at 3.2% y/y and the German ZEW index weaker than expected at a 15-month low of 21.2, EUR/GBP remained under pressure with the move given a further push by a news wire report that Abu Dhabi funds were looking to take an equity stake in BP.

Whilst this was specifically a story with a GBP focus, stock markets across Europe also experienced solid buying interest. By the time of Wall Street’s open, global equities were already 1% higher and these gains extended throughout the New York session with the DJIA hitting a 3-week high just shy of 10,400. Economic news from the US proved mixed, with a wider than expected trade deficit of $42.3bn due mostly to a 2.9% increase in imports which could be considered a positive sign of some increase in business and consumer demand.

Markets were generally inclined to look at this as a sign of the economic glass being half full rather than half empty and shorter-term investors in the US time zone continued the move into stocks which had begun in Europe. From its inauspicious start to the day, the Single European Currency turned around in brutal fashion, with a succession of stop loss orders triggered on the way up to a high of USD1.2739; more than 2 cents off the low and the best level since 12 May.

There was talk of large corporate interest to sell GBP and buy DKK which added further impetus to the EUR move as there is very little fluctuation allowed between the DKK and the EUR. All in all, this was a day which promised little but delivered a lot, not least to those who are still prepared to bet in favour of the EUR.