by Mike Jones
NZD
The NZD has been the strongest performing currency over the past 24 hours. Solid demand for NZD/EUR and NZD/AUD lifted the NZD/USD back up to Monday’s highs around 0.7770, even as European sentiment remained firmly in the doldrums.
Yesterday’s slate of NZ household sector data revealed some encouraging signs of growth in the second quarter. Not only did May electronic card transactions rise a solid 1.2% (from an upwardly revised April of 0.8%), but REINZ and QVNZ housing statistics continued to strengthen. Indeed, the REINZ Stratified Home Price Index jumped to a 6.4% annual pace in May, while the QVNZ measure crept up further, to 3.9% y/y, from 3.1%.
The story wasn’t quite so rosy across the Tasman. Australian business confidence skidded from +4 to -2 yesterday, with worries over Europe uppermost in business concerns. This contrast in the fortunes of the antipodean economies reinforced fundamental support under the NZD/AUD. The cross eventually rose to one month highs above 0.7820 overnight.
Notably, the decline in Australian business confidence also increases the ‘fair-value’ estimate of our short-term NZD/AUD valuation model. Fair-value is now seen in a 0.7850-0.8050 range, supporting our view the cross is poised to move higher.
Tomorrow morning’s RBNZ meeting presents obvious event risk for NZD/AUD. We expect rates to be left unchanged at 2.5%, but for the RBNZ tightening cycle to be pushed back.
Overnight, currencies struggled for direction. Investors waded through the usual swathe of negative European headlines. While these provided headwinds for the EUR, a night of modest gains across equity markets and commodity prices limited the damage on the ‘risk-sensitive’ NZD.
Against this backdrop, the NZD/EUR continued its slow recovery from May’s 0.5900 lows, climbing above 0.6200 for the first time since April.
Looking ahead, the local data calendar is quiet ahead of tomorrow morning’s RBNZ policy statement. Australia has just a consumer confidence update for June today. All up, we suspect more NZD/USD consolidation in the familiar 0.7680-0.7800 range is likely in the short-term.
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Majors
The USD and JPY slipped relative to most of the major currencies overnight. Risk aversion continued to ease overall, but rumours and conjecture on the Eurozone kept currencies whippy, and direction a little haphazard.
Early in the night, it all threatened to go pear-shaped again. Ratings agency Fitch said the risk of a Eurozone breakup had increased and Spain would miss 2012 and 2013 deficit targets. In response, the EUR/USD began to head lower to test 1.2480.
However, broader sentiment didn’t deteriorate, limiting the fallout on the other major currencies. Equity markets notched up gains of 0.2-1.0%, gold and oil prices pressed higher, and bond yields rose.
The VIX index (a proxy for risk aversion) eased from 24% to around 23%. Market chatter the ECB may have restarted its sovereign bond buying programme, as well as its apparent backing of a Eurozone deposit guarantee, helped shore up the mood.
After being held back initially by weaker UK industrial production figures, the GBP/USD climbed steadily from 1.5460 to almost 1.5580. The ‘risk-sensitive’ AUD, NZD and CAD also pushed higher, reflecting the improving equity market sentiment.
Meantime, further widening in Spanish bond yields (the 10-year yield hit new highs above 6.8%) ensured the EUR was kept in check. EUR/USD gains were limited to 1.2520. German Chancellor Merkel again shot down the idea of euro bonds, adding to the headwinds facing the EUR.
Looking ahead, we suspect currencies will continue to chop around within recent ranges in the lead up to this weekend’s Greek election.
Mounting Spanish debt worries will likely continue to limit the near-term EUR/USD topside to around 1.2550. However, EU-US 2-year swap differentials have actually been widening since early June. This has boosted the relative yield appeal of the single-currency, and may ensure dips are limited to around 1.2360 this week.
Other news: UK April industrial production and manufacturing output disappointed with respective flat and -0.7% m/m outturns – the latter well below the -0.1% consensus.
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