By Mike Jones
The NZD has started the week in consolidation mode, spending most of the past 24 hours trading inside a relatively tight 0.7040-0.7120 range. Yesterday’s post-election slide in the AUD/USD proved about as fleeting as a sunny day in the capital. While uncertainty over the shape of the next Australian government still reigns, strong demand from real money accounts and market chatter of increased M&A activity served to prop up the AUD yesterday.
After opening the week around 0.8840, the AUD/USD climbed steadily to a high of almost 0.8980 last night. The NZD was happy to tag along for the ride, given a dearth of local economic developments. The NZD/USD again bounced off support around 0.7050, on its way to an overnight high around 0.7120. The overnight session contained mixed influences for the NZD/USD. A shaky performance from the EUR kept the USD on the front foot, but stabilising risk appetite saw equity markets post modest gains, underpinning demand for “growth-sensitive” currencies like the NZD.
Global stock indices edged up 0-0.8% and our risk appetite index (which has a scale of 0-100%) pushed up to 52.1%, from 50.2%. Looking ahead, NZ data weeks don’t come much sparser than this one, so once again we’ll be watching offshore markets for NZD direction this week. Global sentiment is still fragile and markets are sensitive to further signs of fading momentum in the global economic recovery. With risk appetite restrained, we suspect NZD/USD bounces will be limited to the 0.7150-0.7160 region this week.
This week’s sole local data item – the RBNZ survey of market inflation expectations – is due at 3pm today. Given already lofty inflation expectations, any further uplift in the 2-year ahead measure will surely raise the ire of the RBNZ.
However, we suspect we’d have to see a result north of 3% for the NZD/USD to break through initial resistance at 0.7120. Near-term support is eyed towards 0.7040/50.
Majors
By all accounts it has been a slow start to the week in currency markets. In relatively thin trade, the USD ended the night marginally stronger against most of the major currencies. The most notable exception was against the JPY. Yesterday’s much-hyped meeting between Japanese Prime Minister Kan and BoJ Governor Shirakawa didn’t amount to much. In fact, prospects for either currency intervention in the JPY or further monetary easing were not even discussed.
Markets’ disappointment was obvious; the Nikkei slipped 0.7% to near 9-month lows and the JPY marched higher. USD/JPY slid from 85.60 to almost 85.10 overnight. In contrast, EUR was dragged lower by signs the Euro-zone recovery may be starting to slow. The Euro-zone composite PMI (manufacturing + services) fell to 56.1 in August, compared to the 56.3 analysts had forecast. And with Friday’s surprisingly dovish comments from the ECB’s Weber still ringing in markets’ ears, investors simply added to EUR short positions. From above 1.2700, EUR/USD slipped to nearly 1.2650 sending EUR/GBP to 1½ month lows below 0.8150.
Still, EUR did manage to creep off its lows against the CHF. The CHF has strengthened sharply of late thanks to the twin tailwinds of upbeat domestic data and its status as a “safe-haven” currency. However, the CHF was the weakest performing currency overnight. USD/CHF climbed from 1.0340 to almost 1.0400 after Swiss National Bank Chairman Hildebrand said the economic recovery had “cooled off” and appeared to talk down the chances of early policy tightening. Overall, risk appetite stabilised overnight.
Despite a sea of red in Asian stock markets yesterday, European and US equities managed to post modest gains amid a slew of M&A activity. The FTSE rose 0.7%, the DAX edged up 0.1% and the S&P500 is around flat. The VIX index (a proxy for global risk aversion) drifted lower from around 25.5% to 24.5%. Looking ahead, markets remain sensitive to the prospect of a marked slowing in global growth in the second half of this year, particularly in the US.
The coming week contains a smattering of economic releases, but nothing likely to dislodge views one way or the other. In the US, July housing market data and the second estimate of US GDP for Q2 will be closely watched, as will Fed Chairman Ben Bernanke’s address to the Jackson Hole Monetary Policy Symposium on Friday. The August German IFO looks to be the highlight of the European data calendar.
* Mike Jones is part of the BNZ research team.
All its research is available here.
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