By Mike Jones
NZD
This time yesterday the NZD/USD was showing signs of breaking lower. However, the currency found its feet overnight, surging back into the middle of the well defined 0.8150-0.8350 range.
Given this, the stage may be set for more sideways consolidation in the short-term. However, today’s Chinese data and tonight’s EU Summit present sizeable event risk for the kiwi.
The string of positive global news has continued. Moody’s granted Spain a reprieve yesterday and didn’t slash its sovereign rating.
Meanwhile, faith in a sustained US economic recovery continues to grow by the day (see Majors). These developments underscored further gains in risk appetite overnight. Our index of such is now sitting at a very healthy 78.3% (long-run average 50%).
Buoyant risk sentiment helped the NZD and AUD outperform overnight. But part of the antipodean currencies’ gains also reflects some ‘catch-up’ to the recent bout of EUR strength. After sliding lower for much of the past week, the NZD/EUR bounced to 0.6260 last night.
We’ve also seen solid real money and commercial demand for the NZD over the past 24 hours. This is certainly consistent with the latest update of our currency flows monitor. The model showed strong net buying of the NZD last week from our corporate client base. Net NZD flows were in the 65th percentile.
Looking ahead, today’s swag of Chinese data could be important for the NZD. Chinese data over the past month or so has failed to show any response to recent policy stimulus.
Investors are hopeful today’s September data will provide some evidence of a bottoming in Chinese activity. Further weakness would pose clear headwinds for the AUD and NZD, and could put the NZD/USD on a path back towards support at 0.8145.
There is also tonight’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.
The market no longer expects Greek budget negotiations, or Spain’s ESM application, to conclude in time for the Summit.
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Majors
The USD weakened against all of the major currencies overnight.
Upbeat sentiment continues to ripple through markets, buoying risk-sensitive assets and weighing on the ‘safe-haven’ USD and JPY. The drivers remain the same, namely positive US data and improved sentiment in European sovereign debt markets.
Ratings agency Moody’s failure to downgrade Spain yesterday (the sovereign rating was instead kept at Baa3), underpinned a 30-40bps drop in Spanish and Italian 10-year bond spreads to German equivalents.
Meantime, US housing data (building permits and housing starts) surged ahead of expectations, bolstering confidence in the US housing upturn.
Global equity markets notched up small gains, bond yields rose, and the CRB commodity price index is up around 0.5%. A mixed set of US earnings reports, and caution ahead of the EU Summit and today’s Chinese data probably limited investors enthusiasm to some extent.
Nevertheless, ‘safe-haven’ currencies like the USD and JPY were widely shunned in favour of the NZD, AUD, and EUR. The additional ½ cent rally in the EUR/USD to 1.3120 puts it reasonably close to our 1.3175 target. In time, we expect a push up to here and beyond.
It’s a similar story for the GBP; we’re targeting 1.6300 by the end of the year. This assumes limited fallout on the GBP from the £50b increase in the Bank of England’s asset purchase scheme we expect to be announced next month.
Last night’s BoE minutes were not inconsistent with this view. The BoE appeared to push back the timing of the expected rebound in UK economic activity, and some MPC members saw scope for more QE.
Other news:
*US housing starts leapt 15%m/m (2.7% expected) in September, with building permits up a sizeable 11.6%m/m (1.1% expected).
*UK ILO unemployment rate falls from 8.1% to 7.9% (8.1% expected).
Event Calendar:
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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