By Kymberly Martin

NZD

The NZD slipped a little overnight in the backdrop of a broadly stronger USD. The NZD/USD currently sits at 0.8420.

Squinting through the daily ups and down of the past month the NZD/USD has been consolidating around the 0.8400 level.

The key domestic test for the currency today will be the Household Labour Force Survey (HLFS).

After last quarter’s unexpected softness, the Q4 unemployment rate is widely expected to drop back down to 7.1% today (from 7.3%). However, the data is notoriously ‘noisy’.

If it does not decline as expected the NZD/USD would likely be a casualty near-term. Any positive surprise would likely see the currency re-test recent highs at 0.8480, though there is strong resistance at this level.

It will be a busy day for the NZD/AUD cross. The market has also to digest AU unemployment data at 1.30pm (NZT).

Here, deterioration from 5.4% to 5.5% is expected. If respective data comes in line with expectations, the diverging trends in unemployment on either side of the Tasman will likely see the stronger NZD/AUD trend continue.

Following yesterday’s weak AU retail sales data the NZD/AUD broke higher to sit around 0.8160 this morning.

The cross is now at its highest level since July 2010. We expect further strength over the medium-term as the RBA and RBNZ face diverging rate paths. We have a mid-year NZD/AUD forecast of 0.8330.

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Majors

The USD was broadly stronger against its peers over the past 24-hours. The AUD was the weakest performer.

Our global risk appetite index (scale 0-100%), though down from its recent highs, continues to hang on at close to 80%. While the Euro Stoxx 50 equity index declined 1.3% overnight, the S&P500 has attempted to claw its ways back into positive territory.

A more cautious attitude toward European markets has prevailed since the recent resurfacing of political concerns, and ahead of tonight’s ECB meeting.

The EUR will likely come in for attention at the post meeting press conference. President Draghi will be pressed regarding his view on recent EUR strength.

Overnight, various officials got in on the debate. The French finance minister expressed some concerns regarding EUR strength.

The German government said it did not see the EUR as overvalued. Chancellor Merkel went one step further saying EUR appreciation “isn’t a bad thing”.

This is likely the attitude to be taken by the ECB tonight, seeing a higher EUR as a vote of confidence in its policies. For now, the EUR/USD has pulled back a little from overnight highs close to 1.3600 to sit around 1.3520 currently.

The USD was the key beneficiary, gaining relative to most of its peers. The USD index rose from around 79.55 yesterday afternoon to sit at 79.75 currently.

The AUD continued to soften overnight. On Tuesday, the RBA kept its target rate unchanged at 3.0% but maintained a clear easing bias. Yesterday, this was followed by weaker-than-expected AU December retail sales data (-0.2% m/m vs. 0.3% expected).

The market has increased expectations for future RBA rate cuts. 40bps are now priced, with March seen very much as a ‘live’ meeting.

The AUD/USD has slipped to 1.0310, its lowest level since mid-November. The AU unemployment data release will be crucial for the currency today. The rate is expected to tick up from 5.4% to 5.5%.

Europe will remain squarely in focus tonight with the Bank of England and ECB meetings. Neither is expected to change its target rates.

Event Calendar:

7 February: NZ HLFS employment; AU NAB business confidence; AU employment; UK BoE policy meeting; EU ECB meeting;

8 February: AU RBA policy statement; CH trade balance.

All its research is available here.