By Kymberly Martin
NZD
The NZD has maintained a fairly tight trading range over the past 24-hours, returning to sit just above 0.8240.
The NZD/USD remains near the middle of the 0.8100-0.8350 range that has contained the currency since mid-September. NZD volatility continues to look unsustainably low.
As markets face the US election tonight, there is a good chance volatility begins to increase. Not only is the outcome itself still uncertain, but irrespective of who claims the White House, the real work is still ahead.
The US ‘fiscal cliff’ needs to be negotiated in coming months. Historically, rising NZD volatility have been associated with a lower spot value.
The NZD gained relative to its softer European peers overnight. The NZD/EUR, at 0.6450 now sits just below key resistance. A break above this level would bring early August highs above 0.6600 back into view.
The NZD/AUD was a little weaker overnight. However the key test for the cross will come from today’s RBA meeting, which remains a close call.
If a cut is delivered it would likely see the NZD/AUD re-test September’s 0.8060 highs. An ‘on-hold’ decision, however, could also prompt a significant reaction. Markets would be forced to reconsider the 70bps of RBA cuts priced for the year ahead. The NZD/AUD would likely sink back towards 0.7900.
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Majors
Markets were relatively subdued in the lead up to the US election. Currencies traded relatively tight ranges.
Our risk appetite index (scale 0-100%) remains at a relatively robust 66%, but equities were softer overnight. The Euro Soxx 50 closed down 1.1% and the S&P500 is currently struggling to keep its nose in positive territory.
Markets were cautious given the uncertainty going into tonight’s US election. In addition, negotiations to ensure Greece receives its next bailout package remain protracted. There are now suggestions the Nov 12 Eurogroup meeting is unlikely to deliver a Greek solution.
In the uncertain backdrop there was solid demand for the USD. The USD index has traded slightly higher to 80.80.
Polls for the outcome of the US election are still close. Results should filter through from tomorrow morning Asian time.
The consensus view is still that a Romney victory would be the more USD positive outcome. Certainly, a Romney victory would elicit the bigger market reaction given an Obama win has now been partially priced in.
The EUR slipped overnight as Greek negotiations linger, and Spanish unemployment data for October disappointed (128k unemployment m/m net vs. 110k expected). The EUR/USD took out stops above 1.2800 to now sit at 1.2780, its lowest level since early September.
The AUD was the strongest performer over the past 24-hours. Yesterday afternoon the HSBC services PMI for October ticked down to 53.5 from 54.3, but remained firmly in expansion.
This complements the manufacturing equivalent last week that was shown clawing its way back toward expansion. A sense Chinese risks may be dissipating is helping to underpin the AUD.
However the key today will be the RBA meeting. The market continues to view the decision as a roughly 50/50 call. A cut would likely further reinforce the familiar 1.0150-1.0410 AUD/USD trading range.
In contrast, an ‘on-hold’ decision would be consistent with an upside break out of this range. The currency would likely set its sights on 1.0600.
Tonight there is industrial production data out of the UK and PMI services data from the Eurozone. Still, all eyes will be on the US election.
Other News:
*US ISM Non-Manufacturing 54.2 vs. 54.5 expected
Event Calendar:
6 November: NZ LCI; AU RBA meeting; UK industrial & manufacturing production; EU German factory orders; US Presidential Election; 7 November: NZ RBNZ FSR; EU retail sales; 8 November: NZ HLFS; JN Current account; NZ consumer confidence; AU employment; UK BoE meeting; EU ECB meeting; 9 November: NZ ECT data; CH data slug; EU finance ministers seek agreement on 2013 EU budget.
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