By Mike Jones
NZD
The NZD/USD continues to ping around inside the familiar 0.8145-0.8245 range. The currency is now creeping towards the top end of this range as the rising chance of an Obama victory in next week’s US Presidential elections weighs on the USD.
Reduced trading volumes thanks to the US super storm, the seemingly contained situation in European debt markets, and global data broadly aligning with forecasts for a modest pick-up in global growth have all conspired to keep currencies range-bound and volatility low of late.
Indicative of such, one month NZD/USD volatility (traded in the options market) has fallen to levels not seen since the heady, pre-GFC, days of 2004. At 8.3%, one month vols are certainly well below the long-run average of 13.5%. At these levels, NZD vols look ‘cheap’ to us.
The risks favour a move higher. Given rising volatility is generally associated with a lower NZD/USD, this is a possible downside risk for the currency. It’s also worth noting that low volatility makes vanilla options more attractive as a hedging tool for importers and exporters.
Looking ahead, the event calendar begins to heat up over the next few days, increasing the odds of market volatility increasing.
Next Tuesday’s US election stands out as the headline event. But ahead of this, we also get Friday’s closely watched US non-farm payrolls report (125k jobs expected to be added) and the US ISM manufacturing data tonight.
For today, there is no data due in NZ. But this afternoon’s Chinese PMI figures could be important for the NZD. Forecasters are looking for a small improvement in both the ‘official’ and HSBC PMIs (released at 2pm and 2:45pm respectively), in line with the gains seen in the ‘flash’ estimates.
The key risk for the NZD would be on a possible fall in the PMIs. Such a result could see the NZD/USD back-peddling towards initial support at 0.8180.
------------------------------------------------------------------------------------------------------------------
To subscribe to our free daily Currency Rate Sheet and News email, enter your email address here.
------------------------------------------------------------------------------------------------------------------
Majors
It’s been another night of liquidity-impaired range-trading in currency markets. After declining initially, the USD has bounce-backed in New York trade, to end the night broadly where it started.
US equity markets opened up in positive territory after their two day closure thanks to the super storm.
Not only did upbeat corporate earnings out of Europe bolster sentiment, but estimates of the eventual boost to the US economy from the rebuild began to trickle out.
As equity market sentiment and risk appetite improved, investors shunned the ‘safe-haven’ appeal of the USD in favour of the EUR, AUD, and GBP.
But it wasn’t long before the gains fizzled out. The Chicago manufacturing PMI disappointed expectations for a bounce back above 50 (49.9 vs. 51.0 expected), causing analysts to scale back forecasts for tonight’s ISM survey.
A general trimming of ‘pro-risk’ positions ahead of Friday’s US payrolls figures and next Tuesday’s presidential election also weighed on equity markets and ‘growth-sensitive’ currencies.
US equity markets are finishing the night in the red to the tune of 0.2-0.6% and the VIX index (a proxy for risk aversion) is up around 18.8%, from 17.6% on Friday.
It’s worth noting that the odds of a Obama victory next week have crept higher through the turmoil created by Hurricane Sandy. The consensus is that the Federal response to the storm was relatively impressive.
The odds of Obama being re-elected, as quoted on Intrade, have risen 10 points to 65% over the past week. We’ve previously noted an Obama victory would be the more market friendly, USD negative outcome.
Looking ahead, it’s a busy day/night for global data releases with this afternoon’s Chinese PMIs, and tonight’s US ADP employment and ISM manufacturing reports likely to hog the limelight. These should all be fairly positive, underpinning risk sentiment and keeping the USD under pressure. A return to the recent 78.90 lows on the USD looks likely in coming sessions.
Other News:
*September German retail sales impress at 1.5%m/m vs. 0.3% expected.
*Greece appears to be on the cusp of obtaining a 2-year extension to austerity targets.
*Press reports suggest Spanish PM Rajoy has not ruled out seeking aid but is in no rush to do so.
Event Calendar:
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.
No chart with that title exists.
All its research is available here.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.