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“It’s clear that financial markets are ahead of the real economy” says Chief economist Blanchard

Posted in Currencies

By Kymberly Martin

NZD

The NZD/USD has traded a fairly tight 0.8400-0.8440 range over the past 24-hours, trading at 0.8420 currently.

Despite some larger moves in offshore currency markets, the NZD/USD maintained a calm trading pattern.

It appears underpinned by still lofty (if finely balanced) global risk appetite. A solid Q4 US earnings reporting season is helping in this regard, offsetting murmurs of economic discontents elsewhere (see Majors).

With 20% of the S&P500 companies having now reported, positive earnings surprise sits at 6.60%.

Today’s BNZ PMI release should also help support the view of a generally resilient NZ economy. We continue to see key resistance for the NZD/USD at the mid-December/early-January highs above 0.8460.

The NZD/AUD was stronger yesterday after the low-side AU CPI release. The cross popped from 0.7960 to trade above 0.7980, a level it has maintained overnight.

There are no AU data releases today. The release of the China PMI (2.45pm NZT) has the potential to impact the AUD, and thereby the cross.

The NZD/GBP bumped around in a fairly tight range overnight. It once again failed to break above 0.5330, the level at which it peaked in February 2012.

A break of this level would open the way for revisiting 2011 highs close to 0.5400. Currently the NZD/GBP sits just above 0.5310.

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Majors

The JPY was once again amongst strongest performers over the past 24-hours.The CAD and AUD were amongst the weakest performers, driven by domestic factors.

Risk appetite and equity markets were clinging on by the skin of their teeth overnight, after the IMF released its world economic outlook update.

The IMF cut global growth forecasts, projecting a 2nd year of contraction for the Eurozone. Chief economist Blanchard said “It’s clear that financial markets are ahead of the real economy”.

This statement reiterates the well-known fact that markets often act as a leading indicator for the economy. Still, the inference was clearly that the real economy will need to start delivering or market optimism could fade quickly.

The EUR/USD took the initial brunt of the headlines, dipping toward 1.3260, but soon managed to stabilise around 1.3300. Conversely, the USD index was briefly propelled above 80.10 before returning to sit below 80.00.

The GBP/USD experienced a bit of a bumpy night. Data showed the UK unemployment rate dipped from 7.8% to 7.7% in November. While this was welcomed, Bank of England minutes released at a similar time showed committee members concerned “the sterling real exchange rate might be above the level compatible with the necessary rebalancing of the economy”.

The GBP/USD has ended the night at similar levels to where it started, around 1.5840.

Overnight, the Bank of Canada left rates unchanged as expected. However, it made clear rate hikes were further off than the market may have anticipated.

Lower rate expectations undermined the CAD. The USD/CAD was catapulted from 0.9920 to 1.000.

The AUD also underperformed over the past 24-hours. It was initially knocked lower after the release of a low-side Q4 CPI number. The AUD/USD managed to quickly stabilise to trade around 1.0550 this morning.

The release of the HSBC Chinese flash manufacturing PMI today will be important for determining sentiment toward the AUD. Consensus expects the index to hold up around 51.7.

Tonight, January Eurozone PMI data will be released and is expected to remain firmly in contraction territory.

All its research is available here.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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