National Bank business confidence survey, Bill English in focus

By Mike Jones

The NZD has spent most of the past 24 hours drifting lower. The NZD/USD slipped around 0.5% overnight to around 0.7480. There wasn’t a whole lot of action in currency markets overnight. Certainly, the NZD/USD spent the night largely sidelined, with key direction mostly coming from the EUR. This week’s early rally in EUR/USD again lost steam around the 1.4000 region.

Not only did Citibank recommend cutting long positions in EUR/USD and EUR crosses, but Pimco’s CEO said Greece would likely default on its sovereign debt within three years. As EUR/USD headed swiftly southwards, the NZD/USD was dragged from 0.7540 to almost 0.7480.

Sharp losses in NZD/GBP also provided some headwinds for the NZD. Last night’s stellar UK GDP figures for Q3 (0.8%q/q vs. 0.4% expected) put a stop to persistent rumours additional quantitative easing is needed in the UK. GBP/USD soared from 1.5750 to nearly 1.5900 as a result, knocking NZD/GBP around ½ cent lower to 0.4730. Looking ahead, we suspect dips in NZD/GBP will be limited to around 0.4600 in coming weeks and the currency will hold up in an elevated 0.4500-0.4800 range for the rest of the year.

Arguably, the UK economic outlook is not as dire as that currently priced into the GBP, but NZ’s outlook is far rosier. Indeed, the most recent set of Consensus forecasts point towards annual average growth of only 1.9% for the UK in 2011, compared to the 3.5% we expect for NZ.

This afternoon’s NBNZ business survey will do well if it can hang together as well as it did the previous month. We think it probably will, so long as the impact of the mid-September storms isn’t a big spoiler. We’ll also be keeping an eye on Finance Minister Bill English’s appearance before Parliament’s Finance and Expenditure Committee (due between 9:30am and 1:00pm) for any sound bites on the economy and/or currency.

Short-term support for NZD/USD is seen around 0.7420, with initial resistance eyed on bounces towards 0.7560.

Majors

The USD strengthened against most of the major currencies overnight. The first part of the night was all about strength in the GBP. UK GDP increased by 0.8% in Q3, double the consensus expectation of 0.4%. The data certainly poured cold water on the idea a second round of quantitative easing is likely from the Bank of England next week. Indeed, the BoE MPC had pencilled in growth of around 0.5% into their August forecasts.

In the wake of the data, GBP/USD jumped around 1 cent to above 1.5850. Adding to the buoyant GBP sentiment, ratings agency S&P later revised the UK’s AAA sovereign ratings outlook to stable, from negative. GBP/USD extended its gains to almost 1.5900 and EUR/GBP dived to around 0.8750, from closer to 0.8880 at the start of the night. However, aside from the perky GBP, most of the other major currencies spent the night dribbling lower, reflecting a broadly stronger USD.

Leading the USD’s gains, USD/JPY surged from below 81.00 to nearly 81.40 after Japanese finance minister said currency moves had become “one-sided”, reminding investors intervention is still likely should the JPY rise too far too fast. EUR/USD again struggled around the 1.4000 region, and ended the night closer to 1.3850. Not only did Citibank recommend cutting long positions in EUR, but peripheral sovereign credit spreads moved higher after the Pimco CEO said Greece would default on its debt in three years.

Greek-German 10-year bond spreads increased around 25bps to 715bps. Still, the prize for the weakest performing currency of the night went to the SEK. As expected, the Swedish Riksbank raised its key policy rate by 25bps to 1.0% but said future tightening would occur at a more gradual pace, sending USD/SEK from 6.5650 to above 6.7000. Looking ahead, we suspect talk of additional monetary stimulus is likely to keep the USD heavy in the lead-up to the November 4 FOMC policy announcement. In the short-term, rallies in the USD index should be capped by 78.20 resistance, with near-term support eyed towards 76.80.

While next week’s Fed meeting is certainly the focus for markets, there is a fair bit of other event risk to watch out for. US third quarter GDP on Friday will likely capture the most attention, where the market is looking for a 2.0% (annualised) expansion. US durable goods orders and the University of Michigan Consumer Confidence survey, Australian Q3 CPI, and Thursday’s Bank of Japan policy meeting will also be worth keeping an eye on this week.

* Mike Jones is part of the BNZ research team. 

All its research is available here.