By Mike Jones
NZD
After threatening to break below pivotal support at 0.8080, the NZD/USD rebounded in Saturday morning trade as offshore gloom lifted. At around 0.8130, the currency opens the week at similar levels to where it started last week.
Markets ended last week in an upbeat frame of mind. Indicative of such, our risk appetite index (scale 0-100%) rose to 71.8% – close to a one month high.
A key contributor to Friday’s optimism was US fiscal cliff discussions reportedly getting off to a good start. While this is encouraging, we caution that there is plenty of water to go under the bridge yet.
We’ve been of the view that improving prospects for the global economy provide an important offset to domestic pessimism, in keeping the NZD/USD supported above 0.8000.
However, fallout related to the US fiscal cliff has the potential to derail this global view if a compromise cannot be reached by year-end.
We’ve assumed Congressional leaders will be able to negotiate a benign resolution (see Friday’s note). However, the risk is that delays and uncertainty disrupt market sentiment and risk appetite before a deal is reached.
Certainly, the fiscal cliff will become an increasing focus of attention for markets as we head towards year-end. Not much action is likely this week though; it’s Thanksgiving week.
This week’s local data are likely to paint a picture of an economy still recovering, after a recent rough patch, with suppressed inflation.
Today’s BNZ PSI will need to bounce back from last month’s weakness (49.6) to keep the recovery story alive. Meantime, this morning’s PPIs should underscore the way the high exchange rate is flattening NZ inflation.
The fortnightly GDT dairy auctions are becoming increasingly important for NZD sentiment. Wednesday’s auction should show prices consolidating after a 24% increase in prices since July.
Across the Tasman, Tuesday’s RBA minutes will attract the most attention this week. Hints the RBA retains a clear easing bias would support the tentative recovery underway in NZD/AUD. Our short-term valuation model currently estimates a NZD/AUD ‘fair-value’ range of 0.7950-0.8150. This suggests the ‘fundamental’ backdrop remains supportive of the cross.
All up, we suspect we’re in for a week of sideways consolidation in the NZD/USD. The key support level to watch remains 0.8080 (also the 200 day moving average). A daily close below here would pave the way for a move back to 0.7900. On the topside, initial headwinds are expected on bounces above 0.8200.
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Majors
The USD strengthened against most of the major currencies on Friday.
Investors started the night in a relatively gloomy frame of mind. Not only did rising geopolitical tensions in the Middle East weigh on risk sentiment, but October US industrial production figures undershot expectations by a fair margin (-0.4%m/m vs. +0.2% expected).
European equity markets closed down 1.2-1.4% and the EUR/USD slumped to a low of 1.2690.
However, some of the gloom was reversed later in the night. Investors were encouraged by some tentative signs of progress in early discussions over the US fiscal cliff. US stocks rebounded (the S&P500 closed up 0.5%), the VIX (a risk aversion gauge) dropped noticeably, and the EUR/USD and ‘high-beta’ currencies like the AUD and NZD recovered lost ground.
If nothing else, Friday’s reaction to the tiniest amount of ‘good’ news on the fiscal cliff shows just how sensitive and focused markets have become on this theme. Negotiations have some way to run, so we can expect sentiment to continue to wax and wane in line with signs of progress, or lack thereof.
A sharp decline in the JPY was the standout feature of currency markets last week. USD/JPY soared to 7-month highs of almost 81.40.
Losses in the JPY were largely driven by speculation the likely next Japanese government will take a much more aggressive stance on combatting JPY strength and achieving the BoJ’s inflation target.
However, we suspect the market may be getting a little ahead of itself. The goals of the new government, if elected, will take time to achieve (if they can be at all) and, in the immediate term, US-JP 2-year bond differentials point towards the risk of a snap-back in USD/JPY. Certainly, we’re unlikely to get any action from this week’s BoJ meeting (Tuesday).
Outside of the JPY, most of the major currencies stuck to familiar ranges last week. A quiet week on the data front may mean more of the same is likely this week.
The on-going decline in implied volatility suggests this is what options traders are pricing.
European finance ministers are meeting to discuss Greece on Tuesday. Expect more disagreements over whether an OSI is needed ahead of the next tranche of bailout cash being delivered.
In the US, a bunch of housing data will be most closely watched, with flash PMIs the highlights of the European and Chinese data calendars.
Keep an eye out as well for central bank speak. Fed Chairman Bernanke will be on the wires on Tuesday night, the ECB’s Weidmann tonight, and RBA Governor Stevens on Tuesday afternoon.
Other News:
* Chinese October home prices (released over the weekend) rise 0.5% for the month, to be down 1.1% for the year.
Event Calendar:
19 November: NZ BNZ services PMI; NZ PPIs; UK house prices; EU ECB’s Weidman speaks; US NAHB housing market index; US existing home sales; 20 November: AU RBA Board minutes; JN BoJ decision; AU RBA’s Stevens speaks; EU Finance Ministers meet; US Fed Chairman Bernanke speaks; US housing starts and building permits; 21 November: NZ GDT dairy auction; NZ credit card billings; UK BoE MPC minutes; UK public sector borrowing; US jobless claims; 22 November: NZ migration; CH HSBC Flash PMI; EU Flash PMIs; 23 November: EU German IFO.
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2 Comments
A key contributor to Friday’s optimism was US fiscal cliff discussions reportedly getting off to a good start. While this is encouraging, we caution that there is plenty of water to go under the bridge yet.
Fiscal cliff hysteria is manipulated by self-serving deficit hawks
Mike,
You say:
Our short-term valuation model currently estimates a NZD/AUD ‘fair-value’ range of 0.7950-0.8150. This suggests the ‘fundamental’ backdrop remains supportive of the cross.
Am intrigued as to the logic behind a fair value model. Is it something to do with relative costs in each country; relative trading success (e.g.current account); or comparing the rate to some historical point and them adjusting for events in some way since?
Just intrigued how the industry manages what seems a fairly important price metric for NZ.
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