The NZD has started the week on the front foot. Buoyant global risk appetite and a broadly weaker USD combined to propel NZD/USD from 0.7250 to almost 0.7340 overnight.
Fears of a “double-dip” global recession continue to subside, providing a leg-up to “risky” assets like equities and the NZD. Over the past 24 hours, a gaggle of global manufacturing data (Chinese and European PMIs and the US ISM manufacturing index) confirmed this sector continues to expand in most parts of the world, at a pace slightly faster than most expected.
Helped by a surging start to the week in global equity markets, our risk appetite index (which has a scale of 0-100%) jumped to 56.1% last night, the highest level since early May. Against this backdrop, “growth-sensitive” currencies like the NZD and AUD outperformed overnight, as “safe-haven” currencies like the USD and JPY were shunned.
Demand for ‘commodity-linked’ currencies like the NZD was further reinforced by a sizeable 3.2% gain in oil prices. Nonetheless, the GBP was the night’s start performer, and the associated slide in NZD/GBP (from 0.4640 to nearly 0.4600) ensured last night’s NZD/USD gains were limited to the 0.7330/40 region.
Looking ahead, we suspect some consolidation is likely for the NZD this week. In the short-term, we are still not ruling out a test of 2010’s 0.7440 high, given the current backdrop of positive momentum and rising risk appetite.
But we’re also wary of disappointment from this week’s labour market and commodity price data, and further substantial declines in the USD look unlikely. Our short-term valuation model currently suggests a “fair-value” range of 0.7200-0.7400 for the NZD/USD, and we suspect the currency will spend most of this week trading within this range.
For today, keep an eye out for NZ LCI wage data to be released at 10:45am. However, the NZD will probably be more interested in the RBA’s cash rate announcement, due at 4:30pm (NZT). While an “on-hold” decision looks fait accompli, markets will no doubt pore over the accompanying statement for any signs of a tightening bias.
Majors
The USD weakened against nearly all of the major currencies overnight as refreshed risk appetite dented demand for “safe-haven” currencies. Market sentiment has been cheered over the past 24 hours by a plethora of better-than-expected global manufacturing data.
Fears of a double-dip recession for the global economy have faded accordingly. Sunday’s Chinese manufacturing PMI showed authorities appear to be successfully cooling the Chinese economy, without bringing it to a halt. Last night’s US ISM survey and European PMIs revealed European and US manufacturing output also continues to expand, at a pace marginally quicker than most analysts had expected. Combined with some better-than-expected earnings announcements from HSBC and BNP Paribas, the upbeat data saw global equity markets rise 2.0-2.9% overnight, underpinning a broad improvement in risk appetite.
Indeed, the VIX index (a proxy for global risk aversion) continued its recent slide, falling from 23.50% to almost 22.0%. With investors becoming less risk averse and equity markets generally buoyant, “safe-haven” currencies like the USD and JPY were shunned.
Sentiment towards the USD wasn’t helped by comments from Fed Chairman Bernanke that “We have a considerable way to go to achieve full recovery.” GBP led the charge against the softer USD, amid heavy EUR/GBP selling (rumoured to be related to RBS’s sale of UK branches to Spain’s Santander).
With EUR/GBP breaking below 0.8300 support, GBP/USD soon surged from 1.5700 to a 6-month high of almost 1.5900. While EUR was initially hamstrung by the sliding EUR/GBP, a break of 1.3125 resistance later lit a rocket under the single currency, and it finished the night closer to 1.3200. “Growth-sensitive” currencies like CAD, AUD and NZD were buoyed not only by the stumbling USD, but also broad-based gains in commodity prices.
The CRB index (a broad index of global commodity prices) rose nearly 1% overnight (to be up 7% for the month to date), led by a 3.2% increase in oil prices (to US$81.50/barrel).
The week ahead is packed full of event risk. US data looks set to remain in the spotlight, given recent evidence of a slowing in underlying activity, so keep an eye on tonight’s pending home sales and, of course, Friday’s non-farm payrolls data. In the short-term, we suspect the current backdrop of rising global equities and buoyant risk appetite will keep the USD heavy.
Expect any rallies towards 81.50 on the USD index to attract resistance. Initial support is seen towards 80.35.
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