by Mike Jones
NZD
A double-dose of upbeat global news propelled the NZD/USD to 3½ month highs above 0.8180 on Friday.
Not only did European sovereign solvency fears take a breather, but the July US employment report outstripped analysts’ already robust expectations.
The resulting surge in risk appetite underpinned a sharp rally in global equity markets, the EUR, and the ‘growth-sensitive’ NZD/USD. Our risk appetite index (scale 0-100%) leapt from 62% to almost 69% - a five month high.
It’s worth noting, domestic factors as well as global have contributed to the kiwi’s recent gains. The local economy continues to muddle along at a modest pace.
Indeed, the tone of recent data, while not spectacular by any means, has tended print on the positive side of market expectations. Indicative of such, the NZ economic surprise index we monitor now suggests pressure on the NZD to rise. What’s more, NZ-US 3-year swap differentials have widened out to highly supportive levels around 240bps.
This week’s slate of household sector data will provide an immediate test of our belief the NZ economy is ticking along at a 2-3%y/y pace.
Top billing will be Thursday’s Household Labour Force Survey. A further 0.4%q/q (1.2% y/y) advance in employment is expected – enough to bring the unemployment rate back down to 6.4%.
QVNZ and REINZ housing market reports should reveal yet more evidence of a perky NZ housing market, and electronic spending figures for June should notch up a solid 0.3-0.4% gain.
So the domestic backdrop should remain supportive of the NZD this week. However, globally, we suspect the risks are for a modest paring of investors’ buoyant risk appetite. The net of these factors may keep the NZD/USD contained in 0.8100-0.8245 range.
For today, there is nothing of note on the data calendar. Bear in mind that a NSW Bank holiday may reduce liquidity in the NZD and AUD on the day.
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Majors
The USD was shunned on Friday night as a clear brightening in market sentiment saw risk-sensitive assets soar. The EUR/USD was the bigger winner, ending the night nearly 2½ cents higher.
A double-dose of good news helped assuage global growth worries on Friday. Spanish and Italian bond yields plunged after the Spanish PM suggesting Spain may soon apply for aid from the EFSF.
Later in the evening, a surprisingly strong July US non-farm payrolls report (163k vs. 100k expected) added turbo boosters to the rally. European equity markets rocketed 2-6% higher, with US stocks up around 2%.
Commodity prices and bond yields also moved sharply higher, with the VIX index (a proxy for risk aversion) slipping from 16.5 to 15.6. Against this backdrop, the ‘safe-haven’ USD and JPY were shunned in favour of risk-sensitive currencies and the EUR.
The week ahead doesn’t look quite as action packed as last week. Central banks remain in focus. The RBA meets on Tuesday, and is expected to continue the August central bank trend of ‘no change’. The risk is that market expectations for RBA rate cuts are further trimmed in the wake of the meeting.
Fed chairman Bernanke speaks twice this week. Investors will be hoping for some hints on how the Fed’s view has changed following Friday’s upbeat payrolls figures. However, the bland titles of the scheduled speeches mean we doubt we’ll get anything market moving.
The Bank of England releases its quarterly inflation report on Wednesday. The BoE’s growth and inflation forecasts are expected to be slashed, as it paves the way for additional policy easing. This is a fairly unpalatable mix for the GBP.
We think EUR/GBP is poised to climb even higher, having established a base around 0.7800. Lastly, the Bank of Japan meet on Wednesday. The Government have been ramping up pressure on the BoJ to ease, but we suspect they will hold off for this meeting.
Data-wise, it is a fairly quiet week. Thursday’s swathe of Chinese data will be the highlight. Note that even if the data is weak, hopes for additional Chinese policy easing should shore up market sentiment. This is particularly so following weekend PBOC comments on the need to “reinforce (policy) fine-tuning”.
Other News: German foreign minister says he is opposed to broadening the ESM. Poll of 16 US dealers taken after payrolls shows 63% still expect more QE. July US unemployment rate prints 8.3% (vs. 8.2% expected)
Event Calendar: 6 August: AU NSW bank holiday; 7 August: NZ QES & LCI labour market surveys; AU RBA meeting; UK IP; UK manufacturing; EU German factory orders; 8 August: NZ QV house prices; AU loan approvals; JN trade balance; UK BoE inflation report; EU German IP; 9 August: NZ HLFS employment; NZ consumer confidence; AU employment; CH CPI, retail sales, IP, and investment; JN BoJ meeting; US trade balance; US jobless claims; 10 August: NZ card spending; AU RBA Monetary Policy Statement; CH trade balance; JN IP; EU German CPI; UK PPIs.
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