Bank of England, European Central Bank in focus tonight

By Mike Jones

It has been a case of Groundhog Day for the NZD over the past 24 hours, with the currency trapped in a familiar 0.7300-0.7360 range. Nevertheless, the NZD held up remarkably well considering the barrage of negative news confronting the currency.

Not only did Fonterra yesterday announce it would review its 2010/11 season dairy payout in light of falling dairy prices, but ratings agency S&P placed Telecom NZ’s ‘A’ rating on CreditWatch negative.

NZ finance minister Bill English also had a crack at talking the currency down, saying the high NZD “will impede economic recovery”. It wasn’t long before chinks in the NZD’s armour began to show. From above 0.7350, the NZD/USD spent yesterday afternoon tracking lower to start the night closer to 0.7300.

However, the lows in the NZD/USD around 0.7300 didn’t last for long.

Overnight, “commodity-linked” currencies like the NZD, AUD and CAD outperformed amid further recovery in global commodity prices. A modest bounce-back in the USD was largely shrugged off. The CRB index (a broad index of commodity prices) rose 0.7%, to be up nearly 9% since the start of July. AUD/USD jumped from 0.9100 to almost 0.9180, dragging NZD/USD back up to 0.7350 in its slipstream.

June quarter employment statistics take centre stage today. Indeed, the state of the NZ labour market is shaping up as a key determinant of how quickly the RBNZ will bring monetary conditions back towards a neutral setting. We have Q2 employment growth pegged at 0.4%, and the unemployment rate nudging higher to 6.3%, following the exceptional drop to 6.0% in Q1. Market expectations are centred on 6.4%, with the RBNZ picking a cheerier 6.0%.

We suspect we’ll have to see an unemployment rate in the 5’s for the NZD/USD break through resistance at 0.7400 today. Initial support is eyed on dips towards 0.7330, with stronger support at 0.7300.

Majors

After five straight days of declines, the USD bounced back overnight. Easing fears of a double-dip recession in the US saw the USD index rise about 0.6% as EUR, GBP, and JPY were all pressured modestly lower. The ADP employment survey (+42,000 jobs vs. +30,000 expected) showed that while US labour market conditions remain weak, they are at least not getting any worse.

The US ISM non-manufacturing index also suggested US activity is far from falling off a cliff. In spite of expectations for a mild fall, it actually increased to 54.3 in July (from 53.8 in June). US bond yields crept off their lows as traders realised the US economic outlook is not quite as dire as a 2-year government bond yield at 0.5% would imply (a view we share). 2-year yields ticked up 4bps to 0.57%, with 10-year yields finished the night 6bps higher at 2.95%.

Against this backdrop, traders were forced to unwind USD short positions, sending it spiralling higher against most of the major currencies. USD/JPY jumped from 85.40 to around 86.20, having almost touched a 15-year low of 84.80 during yesterday’s Asian trading session. While many are still wary of possible Japanese intervention to quell the strengthening JPY, officials don’t appear to be panicking.

Indeed, Japanese finance minister Noda said the JPY’s moves have been "somewhat one-sided" ¬– hardly forceful language. In an aberration from recent trends, last night’s European data presented something of a contrast to the better-than-expected US news, weighing on EUR and GBP. A significantly below consensus reading on the July UK Services PMI (53.1 vs. 54.5 expected) tended to confirm UK growth decelerated in Q3. In fact, it was the lowest reading of the survey since June 2009.

GBP/USD slipped from 1.5960 to 1.5880 accordingly. European services PMIs were hardly inspiring either. The composite index fell a bit to 55.8, against market expectations for 56.0. Along with the strengthening USD, this helped drag EUR/USD down ½ cent overnight, to around 1.3150.

Looking ahead, policy announcements from the Bank of England and ECB will hog most of the limelight tonight. Both are expected to keep policy rates unchanged, and there should be little surprises for markets. As such, we wouldn’t be surprised to see a bit of consolidation amongst the major currencies as investors await Friday’s all important US non-farm payrolls release.

* Mike Jones is part of the BNZ research team. 

All its research is available here.