By Mike Jones
NZD
The NZD has started the week on the back foot. Investors lost some of their risk appetite overnight, knocking the NZD/USD from above 0.8200 to around 0.8185.
Currency markets circled in a holding pattern overnight. In the US, it was all about bracing for the impact of Hurricane Sandy.
Elsewhere, investors were happy to stick to the sidelines ahead of today’s Bank of Japan meeting, a decision on Greece’s budget extension, and the important US data later in the week (payrolls and ISM manufacturing).
Still, a bit more dreary Spanish economic news and an uninspiring night in European equity markets were enough for investors to rein in their risk appetite a touch. At 68.8%, our index of risk appetite (which has a scale of 0-100%) is now well below the near 80% peak of a fortnight ago. This helps explain why the ‘risk-sensitive’ NZD/USD keeps finding the air a little thin above 0.8200.
But for now, the currency’s failure to sustain gains above 0.8200 simply means the familiar 0.8145-0.8245 range has become even more entrenched. Today’s data and events are unlikely to provide a trigger for a break out of this range.
Australian new home sales will be released at 1pm (NZT), and the Bank of Japan’s latest policy decision should hit the wires late in the afternoon.
A failure by the BoJ to take decisive easing action to combat JPY strength (as we expect) could briefly halt the NZD/JPY uptrend. But we expect it will resume before long, reflecting stuttering Japanese economic growth and the likelihood NZ-Japan yield differentials remain elevated. We’re targeting 66.00 by year-end, before a push up into the high 60’s in the first half of 2013.
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Majors
A slightly more cautious tone set in overnight, amid a dearth of news. Creeping risk aversion buoyed ‘safe-haven’ demand for the USD, which is higher relative to all the major currencies (with the exception of SEK).
With the US busy battening down the hatches ahead of Hurricane Sandy, currency markets were relatively quiet overnight.
Still, a lacklustre day in European and Asian equity markets (US equity markets were closed), dismal Spanish retail sales data, and the fact Greece is no closer to a budget deal all weighed on sentiment.
Indicative of the more cautious mood, the EuroStoxx 50 fell 0.7%, and commodity prices are generally lower – oil prices are down a bit over 1%.
Against this backdrop, the USD continued to grind higher as investors trimmed short positions. The ‘growth-sensitive’ NZD, AUD, and CAD bore most of the brunt of the stronger USD. In contrast, the JPY shuffled sideways as markets await today’s Bank of Japan meeting.
While the BoJ looks set to keep its policy rate at 0.0-0.1%, markets are bracing for a ¥10-15t top-up to the BoJ’s asset purchase programme. The Japanese economic outlook has continued to deteriorate and the BoJ is under pressure from the government to loosen monetary conditions and counter the strong JPY, particularly with inflation still undershooting the BoJ’s target.
However, only a ‘shock and awe’ type easing would succeed in substantially weakening the JPY in our view. This is unlikely. Our forecasts have USD/JPY remaining below 80.00 through to year-end.
Other News:
*The Bank of England’s Dale warns that the UK economy will weaken again as the Olympics boost to the Q3 GDP numbers fades.
*US real personal income rises by 0.4% in September, in line with expectations.
* Spanish real retail sales plunge from -2.1%y/y in August to -12.6%y/y in September.
Event Calendar:
30 October: AU home sales; JN BoJ decision; AU RBA’s Lowe speaks; US consumer confidence; 31 October: NZ building consents; AU building approvals; AU credit growth; US Chicago PMI; US Fed’s William’s speaks; 1 November: CH PMI; CH HSBC PMI; AU RBA commodity prices; UK PMI; US ADP employment; US jobless claims; US ISM manufacturing; 2 November: NZ ANZ commodity prices; EU PMIs; UK PMI construction; US non-farm payrolls; US factory orders.
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