By Kymberly Martin
NZD
The NZD/USD was one of the weakest performers over the past 24-hours, giving back much of the previous day’s gains. It trades around 0.8000 this morning.
The NZD/USD started to drift lower yesterday afternoon, after memories of the previous day’s weak US ISM data started to fade.
The USD was broadly solid overnight with the ‘risk sensitive’ NZD, CAD and AUD falling from favour.
In the early hours of this morning the details of the most recent (GDT) dairy auction were released. As we had anticipated, the results showed a modest further pullback in prices.
Average prices declined 5.3% from the previous fortnightly event. This is consistent with our view that NZ commodity prices will broadly remain a support for the NZD in the year ahead, but some of the recent ‘drought-inspired’ gains in diary prices will ease.
We hold a negative bias for dairy prices over coming months. However, prices remain 54% above year earlier levels. We also believe this result will not threaten Fonterra's recent dairy payout forecast.
Post the results, the NZD/USD has found support in the crucial 0.7940-0.7980 window. This remains the key support area for today. Resistance is eyed at 0.8050.
The NZD was also broadly weaker on the crosses, except relative to the AUD where it managed to hold its own.
Relative to both the EUR and the GBP the NZD has returned to key support levels, at 0.6110, and 0.5230 respectively. If these levels fail to hold it would likely open the way to deeper declines on these crosses.
For today, we expect the release of the ANZ commodity price index to show world prices for NZ commodities dipping around 2%, consistent with the diary auction results. The key for the NZD/AUD cross will likely be this afternoon’s release of AU Q1 GDP.
Any disappointment would likely benefit the NZD/AUD, which currently sits around 0.8300.
Tonight, general USD sentiment (and by implication NZD/USD performance) will be driven by the US ADP employment report, as a precursor to Friday’s all important US non-farm payrolls release.
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Majors
In subdued overnight trading, the USD index was marginally stronger. The key underperformers were the CAD, AUD and NZD.
Overnight, a 2% rebound in the Japanese Nikkei index was followed by modest positive returns from European equities.
Still, our risk appetite index (scale 0-100%) that was as high as 80% just two weeks ago, now sits around 63%.
The US S&P500 is currently down 0.7%. As the debate around tapering of US QE intensifies in coming months, the recent increase in market volatility will likely become more pronounced.
In currency markets, the USD index had a solid tone in the backdrop of consolidating US bond yields. It traded from lows around 82.60 yesterday afternoon, to sit just above 82.80 this morning.
European currencies were bound by relatively tight ranges overnight. However, the USD/JPY managed to break above the 100.00 level again, sitting just above this psychologically important level this morning.
It was the ‘risk sensitive’ CAD, AUD and NZD that were the key underperformers overnight. The RBA kept its cash rate unchanged, as expected, yesterday afternoon.
However, despite some volatility in the AUD immediately post the announcement it seemed to have no lasting impact on the downward trend in the AUD yesterday, which continued overnight.
This saw the AUD/USD give up much of its previous day’s gains, to sit around 0.9630 currently. Key support for the AUD/USD remains around the 0.9550 level.
For today, key for the AUD will be the release of AU Q1 GDP. Consensus expects a 0.7%q/q (2.7%y/y) outcome. Our NAB colleagues see risks as being to the downside. Any disappointment would likely take its toll on the AUD.
Tonight, EU Q1 GDP will be released along with EU PMI Services data.
In the US, the focus will be on the ADP employment report as a precursor to Friday’s all-important US non-farm payrolls release. The Federal Reserve will also release its Beige Book survey of the economy tonight.
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