By Mike Jones
NZD
The NZD underperformed last week. With NZ inflation slipping to 13-year lows, markets priced in a higher chance of an RBNZ rate cut. As a result, yield support for the NZD crumbled and momentum factors flipped to the downside.
However, a sustained break of the key 0.8145 support level again proved a bridge too far for the NZD/USD. A positive NZ dairy price auction and signs Chinese activity is accelerating again soon lifted the currency back into the familiar 0.8145-0.8240 range.
Domestically, all eyes this week are on new RBNZ Governor Wheeler’s first OCR review. The market prices a small (~15%) chance of a debut 25bps cut from Wheeler.
Economists, meanwhile, are unanimous in expecting no change. In terms of the statement, we’ll be interested in how the RBNZ is balancing the still murky global backdrop, firm NZD, slower domestic growth and inflation indicators, against the likes of reheating house prices and emerging credit growth.
For the NZD, the outcome likely to cause the biggest (negative) reaction would be a clear shift from the Bank to an outright easing bias. However, we think this is unlikely. More likely is a balanced, steady as she goes type affair. This would see a knee-jerk bounce in the NZD as near-term easing expectations are priced out.
In any event, global developments will likely prove to be more important for the NZD this week. There are plenty of central bank decisions to keep an eye on and GDP data out of the UK and US are due. But it’s the ‘flash’ PMIs that perhaps hold the most relevance for the NZD.
Following last week’s encouraging Chinese data, hopes are high that the HSBC Chinese PMI will show an improvement from last month’s disappointing 47.9. A lower or unchanged outturn would take some toll on the NZD.
Overall, the NZD/USD still looks a little susceptible to the downside. More so now that the USD is finding more support (see Majors). At around 0.8160 currently, the key 0.8145 support level is not far away. A daily close below this level would pave the way for a deeper correction back towards 0.8000.
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Majors
After lurching higher on Friday night, the USD has spent the past 24 hours consolidating. Overall, the USD index is around 0.5% higher than Friday morning levels.
Investors’ mid-week optimism evaporated on Friday night. A mini meltdown in US stocks (on the 25th anniversary of Black Monday) triggered a bout of widespread risk aversion, pulling down ‘risk-sensitive’ currencies and bolstering demand for the ‘safe-haven’ USD and JPY.
The major US stock indices shed 1.5-2.2%, amid underwhelming earnings reports from MacDonald’s and GE. The VIX index now sits at 1½ month highs around 17.5% (last week’s lows ~15%), indicative of a less risk loving attitude amongst the investment community.
For this week, the strength of Wednesday’s ‘flash’ PMIs will be important for global risk sentiment. Recent positive signs on the global economy (positive US data and signs of a bottoming in Chinese activity) have investors anticipating small improvements in the Chinese and European PMIs. If the numbers fail to live up to these expectations, we can expect more risk aversion and more support for the USD.
Today’s third and final US Presidential debate may also hold relevance for the USD. The latest polls have Obama and Romney roughly neck and neck around 47%. An Obama victory appears to be the more market friendly outcome. So any gains in Romney’s popularity post the debate would likely undermine risk sentiment.
Both the US and UK produce advanced Q3 GDP estimates this week. The consensus expects a 1.9% (annualised) gain in US GDP and +0.6%q/q (-0.5%y/y) for the UK. An undershoot for UK GDP would add weight to our view a further £50b in quantitative easing is likely from the Bank of England in November.
In Australia, the key report will be Q3 CPI. We suspect a core inflation outturn above 0.7% is needed to stop the RBA from cutting rates another 25bps in November (the market prices a 25bps cut with an 80% probability).
Elsewhere, it’s a busy week for central bank decisions. The Bank of Canada meets tonight (unchanged at 1.00% expected), the FOMC decision takes place Thursday morning, and both the RBNZ and Riksbank meet on Thursday. No major policy announcements are expected from anyone.
Other news:
* EU summit agrees on putting legal framework for banking union in place by the end of 2012.
Event Calendar:
23 October: CA Bank of Canada decision; US Richmond Fed index; 24 October: AU CPI; CH HSBC Flash manufacturing PMI; EU German IFO; EU Manufacturing PMIs; EU ECB’s Draghi briefs German lawmakers; US new home sales; US FOMC decision; 25 October: NZ RBNZ OCR Review; UK GDP; US Chicago Fed index; US durable goods orders; US pending home sales; US jobless claims; 26 October: NZ trade balance; US Michigan consumer confidence; US GDP
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