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Speculators positive on US$ as upbeat US economic data and more optimistic sentiment pulled US bond yields and equities higher

Posted in Currencies

by Mike Jones

It’s been another night of quiet consolidation around 0.7900 for the NZD/USD.

Overall, it’s been a fairly tame offshore session for currency markets, as investors stopped to pause for breath following all the post-Bernanke excitement.

Still, a general bias to push the USD higher has re-emerged after some upbeat US economic data restored confidence in the US recovery. The more optimistic sentiment also pulled US bond yields and US equities higher.

However, for the moment, the NZD/USD remains fairly resistant to the headwinds of a stronger USD. Indeed, the currency essentially tracked sideways overnight in a tight 0.7850-0.7910 range.

Speculative investors appear far more inclined to express a positive USD view in those currencies with dovish central banks like the JPY, AUD, and to a lesser extent the EUR.

Both the JPY and AUD underperformed overnight, the latter not helped by various reports of Chinese authorities warning against the use of large scale stimulus.

NZD/AUD has carried on its merry way higher, and is now close to the recent 5-year highs around 0.8630.

In our Wednesday strategy note, we suggested cyclical NZD/AUD drivers are still strongly positive, and long-run valuations are not yet problematic. As a result, we remain comfortable with our forecast for further appreciation in the cross, to 0.8850 by year-end.

Near-term, momentum is positive and with the RBA likely to cut rates again on 6 August, we suspect we’ll see a push through the 0.8630 highs before long.

For today, net migration and credit card billings figures will be released in NZ. Neither tends to move the currency.

However, it will be worth keeping an eye on Chinese repo markets for any evidence of the liquidity pressures that knocked back the AUD (and by association the NZD) yesterday.

Short-term resistance on the NZD/USD remains around 0.7950, with pullbacks into the 0.7830/40 window likely to attract support.

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Majors

Investors’ focus switched from central bank rhetoric back to the fundamentals overnight. A string of encouraging US data and corporate earnings reports buoyed sentiment, and breathed life back into the trend for a stronger USD.

Not only did the US Philly Fed index rise to the highest level since March 2011 (19.8 vs. 8.0 expected), but jobless claims dropped sharply to 334k (345k expected), close to a 5-year low.

In response, US interest rates recouped much of yesterday’s Bernanke-inspired losses. 10-year Treasury yields climbed from 2.46% back to the familiar 2.55% level.

Equity markets pressed higher. The Eurostoxx 50 notched up a 1.4% gain, helped by positive UK retail sales data and a successful Spanish bond auction.

US equities are up 0.2-0.6% as the US corporate earnings season continues to impress. Of the 84 S&P500 firms that have reported their Q2 earnings to date, 55 (65%) have beaten expectations.

Overnight action in currency markets has been fairly subdued, with investors no doubt a little battle wary from all the post-Bernanke volatility. Still, the bounce in US bond yields did see a general pro-USD bias re-emerge.

USD/JPY climbed from 99.60 to almost 100.50 and EUR/USD once again encountered sellers above 1.3150. The single currency eventually settled lower around 1.3100.

The GBP (along with the CAD and NZD) was one of the few currencies to shake off the stronger USD, following some solid retail sales figures (2.2%m/m vs. 1.7% expected).

As we noted yesterday, the Fed’s plan to taper QE will be a major talking point of the G20 meeting tonight and over the weekend. We can expect the usual soothing words about the global economy and a repetition of the usual line that the G20 “will not target exchange rates for competitive purposes”.

We doubt there will be anything for markets to get excited about. With little else on the economic data calendar, it’s shaping up as a quiet end to the week.

Event Calendar:

19 July: NZ net migration; NZ credit card billings; UK public sector borrowing.

All its research is available here.

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