By Kymberly Martin
NZD
The NZD/USD has traded a fairly tight range over the past 24-hours, sitting again at 0.8000 this morning.
Overnight, the most recent global dairy auction posted a positive result. Dairy prices rose 1.1% on average, against our expectations of a small fall.
However, the results confirm our broader view that dairy prices remain strongly supportive of the nation’s terms of trade, providing a decent income boost to the country. This should help underpin the NZD.
Gains in the first quarter may be reflected in a mild improvement in the NZ Q1 current account, released this morning.
The NZD has traded a tight range between 0.7960 and 0.8020 over the past 24-hours, returning to trade around 0.8000 currently.
Overnight, the NZD strengthened on most of the key crosses, while consolidating against the EUR. Against the backdrop of a weaker JPY the NZD/JPY rose from75.60 to 76.20. Since the start of the month this cross has been consolidating above the key support level at 75.00.
The NZD/AUD was on a steady path higher yesterday. RBA Minutes confirmed the Bank maintains an easing bias but is in no rush to cut further.
The NZD/AUD climbed above 0.8450 early this morning before coming to settle just above 0.8430. The 0.8460 level remains a crucial resistance level. It marked the highs on the cross last month.
Ultimately we see a break higher to our year-end target for the NZD/AUD of 0.8900.
Today, NZ current account data will be released. We see this slimming to 4.7% of GDP in the year to March, down from 5.0% in calendar 2012. Longer-term, we see a deteriorating trend through 2014/2015.
However, the NZD’s fate is largely in the hands of tomorrow morning’s US FOMC meeting (see Majors). The only thing that can be said with any sort of certainty is that it is likely to result in a fairly volatile early morning tomorrow (NZT).
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Majors
There was some USD volatility around US data delivery overnight. Overall, the USD is little changed over 24-hours and the JPY is the weakest performer.
All eyes remain firmly fixed on the US FOMC announcement tomorrow morning (NZT). In the lead-up to the highly anticipated meeting our risk appetite index (scale 0-100%) remains steady around 62%. Japanese and European equity markets were fairly flat and the S&P500 is currently up 0.90%
The USD index showed some volatility around the release of US CPI and housing starts data. May US headline CPI was shown picking up to 1.4%y/y (1.1% previously).
However, the result was largely due to some unfavourable base effects. The result still remains well below the Fed’s 2% target, leaving it plenty of scope to very gradually phase out its highly accommodative policy. The USD index initially surged toward 81.00, before moving back down to around 80.60 this morning.
Against this backdrop, the JPY showed a generally softer trend. Over the past few days the USD/JPY has moved off support around the 94.00 level to sit around 95.20 currently.
The GBP/USD briefly spiked higher on the delivery of UK inflation data, but generally sustained a downward path overnight. UK CPI for May came in at 2.7%y/y (2.6% consensus expectation). This suggests inflation for Q2 will continue to be running above the BoE’s target, necessitating the incoming Governor Carney to formally write a letter to the Chancellor.
Inflation looks set to remain above target over the medium-term. This will act as a constraint against the BoE to considering a significant increase in asset purchases, to help spur the economy. The GBP/USD traded as low as 1.5570 this morning before crawling its way back to 1.5640.
The AUD has slipped lower over the past 24-hours, though finding its feet overnight. Yesterday’s RBA Minutes confirmed a somewhat-softened easing bias, but there’s no sense the Bank is ready to act.
The RBA appears content to let policy work through to domestic demand. It also gave the implicit green light to further AUD depreciation. It commented that the AUD could ease further over time as the terms of trade declined and this would help re-balance the economy.
At this stage our NAB colleagues continue to see the likelihood of another RBA easing before year-end but these Minutes suggest the July meeting would be too soon. The AUD trades around 0.9500 currently.
Tonight the Bank of England releases its Minutes, but these are unlikely to garner much attention as the market awaits the US FOMC meeting.
The Fed will likely tread a careful path between further preparing the market for ‘tapering’ of asset purchases, while emphasising that actual policy ‘tightening’ remains a long way off.
Tightening is still highly dependent on improvement in the US labour market. There is certainly potential for significant volatility in markets around the announcement, as recent market sensitivity has shown.
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