Appetite for risk currencies diminishes again

The New Zealand dollar (NZD) was one of the few currencies to lose ground against the otherwise sliding United States dollar (USD) last week, as investor risk appetite deteriorated into the end of the week.

This is contrary to the previous week where the AUD, CAD and NZD were the best performers. A slightly lower growth rate in China; another batch of weak US data and a cautious Fed minutes undermined investor sentiment despite a week of generally positive US earnings reports.

The NZD was also undermined by position adjustments after heavy buying seen earlier in the week. With equities faltering sharply on Friday many of these positions unwound with little in the way of fresh buying interest evident despite the relatively large intraday move. All of the above suggests that investors were put off by the events of last week and appetite for risk currencies has diminished again.

The ongoing trail of weak US data and some very cautious words from the Fed has the USD trailing badly in the G3 “ugly sister” contest. The JPY is the "go to" currency at times of heightened risk aversion while the EUR continued to benefit from calming sovereign debt markets in Europe and short covering. The NZD will likely remain at the mercy of investor risk appetite and there are a number of event risks in the coming week that might keep investors sidelined.

Ben Bernanke will give testimony about the US economy to US lawmakers on Wednesday while the much awaited results of the EU stress tests on European banks will be released on Friday. We would expect NZD to find solid resistance now near 0.7180 with a further push lower towards the 0.7000-50 area the greater risk. While there are no big NZ data releases or events this week, there are a number that will give important insight into the economy, at a time when the strength of the recovery is being questioned.

For Monday morning’s BNZ Performance of Services Index, the question is, will it match the good-growth pulse already seen for its PMI cousin?

Majors

The European FX market continued where it left off Thursday, by buying the EUR from the outset. The backdrop of a nervous risk environment remained, with equities flitting between positive and negative, while risk-related currencies struggled to hold up.

The morning squeeze higher in the EUR was relentless. EUR/USD rose from 1.2900 to 1.3008 pulling all the EUR crosses with it in what will have been a painful squeeze for many. EUR/JPY was the first cross to buckle, topping out at 113.35 mid morning as the weight of USD/JPY’s decline finally started to tell. A break down through 87.00 in the latter helped push the JPY higher across the board. Data and official comment from Europe was light with position unwinds driving trade.

US CPI for June was expectedly benign. Although the m/m core rate rose a shade above forecast at 0.2%, the headline annual measure tumbled from 2.0% to 1.1% and the core annual measure remains just 0.9% as the wealth of weaker activity data increases speculation of the Fed may have to return to QE at some point down the road.

However, it was an outsized drop in the University of Michigan’s preliminary July consumer confidence report (to 66.5 from a cycle peak of 76 and against a forecast 74) that really set the scene for the rest of the session. One can argue the decline in equity prices over recent months has impacted confidence and with stocks forging something of a rebound recently, the worst may be over for indicators such as Michigan.

While that may be the case we’ll need to see a turnaround in the data before markets will be able to hold a recovery. In the meantime the JPY looks well-placed – absent intervention threats. USD/JPY led the way lower from here, with stop losses triggered below 86.90 and EUR/JPY breaking down through 111.80. We would expect to see signs of verbal rhetoric against JPY gains when Japan returns from a holiday on Tuesday.

We continue to see 85 as an important level for USD/JPY and the MoF. EUR/USD collapsed back from above 1.30 to 1.2915, but other EUR crosses outside of EUR/JPY held up well such was the decline in GBP, AUD, NZD etc against the USD. Indeed even EUR/CHF rallied strongly as the CHF lost ground against the USD. We continue to view the EUR’s recent gains as a position-led move, which has been exaggerated by the break above the 1.27-1.28 area and amid some unsubstantiated discussion of the return of sovereign bids.

As such we would expect the EUR to suffer against the JPY and CHF in a risk-averse environment.

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