By Mike Jones
NZD
NZ inflation at 13-year lows (and below the RBNZ’s target band) has been enough to relegate the NZD to the bottom of the G10 performance rankings of the past 24 hours.
The slide in the currency has seen key support levels on both NZD/USD and NZD/AUD give way. The lacklustre performance of the NZD is all the more eye-catching given a relatively buoyant night for global risk sentiment (see Majors).
Annual inflation at 0.8% certainly increases the odds of an RBNZ rate cut. We put these at around 40%. The market begs to differ. It now prices around 1½ RBNZ rate cuts over the coming 12 months.
The lower NZ yields resulting from this shift in cash rate expectations has weighed on the NZD over the past 24 hours. NZ-US 3-year swap differentials – our preferred measure of the NZD’s yield attractiveness – have slipped from 225bps to 217bps.
After a knee-jerk pullback to 0.8150, the NZD/USD has continued to underperform overnight, helped by heavy speculative selling of the NZD/AUD. As the NZD/AUD was dragged through 0.7950 support, the NZD/USD was briefly pitched below 0.8120. Note that we exited our long-held NZD/AUD long position (entered at 0.7690) at 0.7930.
Early this morning, a positive dairy price auction helped the currency scrape off its lows. Prices rose 1.8% on average, following the 1% dip in the last auction. This is very much in keeping with our positive trend view (on reasonable world growth expectations and supply tightness as a result of the likes of the US drought).
Dairy auction prices are now 27% above their mid-May lows and further near-term gains look likely.
Looking ahead, the short-term outlook for the NZD is finely balanced. The break below the critical 0.8145 support level means technical and momentum factors are working against the NZD/USD (our momentum model entered a short position at 0.8146).
Moreover, the NZD/AUD uptrend appears to have stalled for now. However, global risk appetite is still riding high and this is likely to continue in the short-term as Spain and Greece inch towards EU aid. The net of these factors leave us with a view the NZD/USD will continue to dribble lower in the short-term, but the downside looks relatively limited. The next key support level is eyed around 0.8080.
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Majors
Safe-haven assets like the USD were shunned overnight after a string of positive news bolstered confidence in the global economy.
Global equities markets, bond yields, and risk appetite gauges are all higher.Europe was the epicentre of last night’s rally.
Rumours Spain will apply for a precautionary credit line from the ESM, rather than a full blown bailout (thereby limiting conditionality), encouraged sentiment early in the night.
A more positive German ZEW survey later reinforced the ‘risk-on’ vibe. The surprising jump in the survey’s economic sentiment index (to -11.5 vs. -14.9 expected) suggested to some the German economy could be past the worst, and may yet skirt a technical recession.
Against a backdrop of easing sovereign bond spreads and soaring European equities (the Euro Stoxx 50 closed 2.5% higher), the EUR/USD marched higher from 1.2960 to almost 1.3050.
The GBP, CHF, and SEK were all dragged higher in sympathy.Looking ahead, we expect the EUR/USD will return to the recent 1.3150/1.3200 highs in time. However, tonight’s Obama/Romney TV debate may well test this view.
A better performance by Obama, who still leads, would be taken as shoring up that dominant position and extending the USD’s decline. This would allow the EUR rally to continue. On the other hand, a second Romney win may see the EUR/USD slip back to the 1.2935-65 area.
There is also Thursday’s EU Summit to keep an eye on. Investors appear to have reigned in their expectations on this front, so the potential for disappointment is a little lower. It should be reasonably clear by now that the Greek budget negotiations won’t be finished in time for the summit, and last night’s Spanish news will provide comfort that Spain will apply for official aid at some point, even if it is not before the Summit.
Other news:
*October RBA minutes keep market expectations of a November 25bps rate cut largely intact.
*US equity market sentiment buoyed by upbeat earnings reports from Johnson & Johnson and Goldman Sachs.
*Bank of Italy says the Italian recession is easing and is expected to end in 2013.
*US CPI prints a shade higher than expectations (0.6%m/m vs. 0.5% expected), reflecting higher oil prices. The core reading (at 0.1%m/m) was more subdued.
*UK inflation eases to a three-year low in September (0.4%m/m, 2.2%y/y), as expected.
Event Calendar:
17 October: UK BoE minutes; US housing starts; 18 October: NZ job ads; AU NAB business conditions; CH industrial production, GDP, retail sales & investment; US Philadelphia Fed index; EU European Summit begins in Brussels; 19 October: NZ net migration; US home sales.
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