Federal Reserve speakers to be watched closely for hints on whether more quantitative easing is likely

By Mike Jones

The NZD/USD has spent most of the past 24 hours consolidating in a relatively tight 0.7330-0.7370 range. Currency markets barely stirred overnight. Neither economic data nor stocks markets provided any clear direction and investors were largely content to sit on the sidelines ahead of some of important data releases due out later in the week.

After storming higher for most of the month, equity markets paused for breath, tempering investors’ risk appetite and demand for “growth-sensitive” currencies like the NZD and AUD. European equity indices slipped 0.3-1.0% and the S&P500 was broadly flat, despite a flurry of M&A activity.

Our risk appetite index (which has a scale of 0-100%) eased to 55.8%, from nearly 58% at the end of last week.

Still, the NZD/USD managed to piggy-back of the decidedly perky AUD/USD, such that it ended the night around the top end of its 0.7330-0.7370 range.

Modest gains in metals prices served to underpin the AUD/USD overnight. Most notably, gold prices eked out a fresh record high of US$1300/ounce. Looking ahead, this week’s mostly second tier data offering looks set to continue the dreary tone of recent domestic data.

Perhaps the most important release for the week will be Thursday afternoon’s NBNZ business survey. On balance, our gut feel is businesses’ optimism will ease a bit further. So the domestic picture should remain a drag on the NZD/USD this week.

However, we suspect a supportive global backdrop will limit any dips to the 0.7200 region. Not only is USD sentiment in the doldrums, but commercial and real money accounts continue to show solid demand for NZD and AUD on dips. Our short-term valuation model currently implies a NZD/USD “fair-value” range of 0.7200-0.7400. We suspect the NZD/USD will spend most of the week trading within this range.

Majors

It’s been an extremely quiet start to the week in currency markets. A fairly light data calendar and scant direction from equity markets saw most of the major currencies confined to recent ranges. The USD index simply consolidated around the 7-month lows struck on Friday.

Markets were briefly shaken from their slumber after ratings agency Moody’s downgraded Anglo Irish Bank three notches to Baa3. The knee-jerk reaction saw EUR/USD pushed from 1.3470 to nearly 1.3430. However, the impact on EUR proved fleeting. Supporting EUR sentiment, ECB President Trichet said "We expect the recovery to proceed at a moderate pace, with a positive underlying momentum.”

The renewed EUR momentum briefly pushed the single-currency through a rumoured option barrier at 1.3500, a fresh 5-month high. According to the latest CFTC data, the speculative community now hold a net long EUR position for the first time this year. GBP/USD consolidated around 7-week highs after the IMF gave the UK’s deficit reduction plan the thumbs up, saying it “greatly reduces the risk of a costly loss of confidence in fiscal sustainability and will help rebalance the economy”.

Data showing UK home prices rose at the slowest annual pace in 7 months in September (1%y/y) had little impact. USD/JPY spent the night drifting lower, and at around 84.20 has now unwound around half of its post Bank of Japan intervention gains.

Despite the BoJ’s desire for a weaker JPY, economic fundamentals are tending to drag USD/JPY in the opposite direction. Indeed, US-JP 2-year bond spreads hit a fresh 21-month low overnight.

Global equity markets paused for breath overnight, limiting further gains in risk appetite and ‘growth-sensitive’ currencies like AUD, NZD and CAD. Most stock indices slipped 0.2-0.7%. Nevertheless, September is still shaping up as the strongest month for equity markets for many years; the S&P500 is up 9.1% over the month to date.

Looking ahead, Friday’s break below the key 79.60 support level on the USD index (the lows from February and March) means further USD weakness may be on the cards for this week. However, we suspect we’ll have to see further clear signs of deterioration from upcoming US economic data to see speculation of further Fed easing drag the USD lower. Friday’s personal income, consumer confidence and ISM manufacturing data will be worth watching in this regard.

Markets will also be paying close attention to this week’s long line-up of Fed speakers for additional hints on whether additional quantitative easing is likely. Near-term support on the USD index is eyed towards 79.00, with initial resistance at 80.10.

* Mike Jones is part of the BNZ research team. 

All its research is available here.