by Mike Jones
NZ Dollar
The NZD has been one of the few currencies that hasn’t been buoyed by the retreating USD tide overnight. Instead, the NZD/USD basically shuffled around in a sideways 0.8275-0.8340 range.
The kiwi’s underperformance probably reflects: 1) a reassessment of just how hawkish yesterday’s RBNZ Governor Wheeler’s op-ed was.
Notably, interest rate markets barely budged in response. Two year swap yields continued to flat-line around 3.44%, keeping NZ-US swap differentials unchanged around 310bps; and 2) another slug of NZD/AUD selling by speculative accounts overnight.
The NZD/AUD slipped from 0.8880 to around 0.8820. Support at 0.8760 should continue to hold, particularly if next week’s business confidence data (NZIER for NZ, NAB for AU) continues to tell a story of the divergent economic prospects of the antipodeans.
Looking ahead, most of the direction for the NZD/USD has come from the US and USD side in recent weeks and we suspect this will remain the case as we enter a critical, yet highly uncertain, period of US budget negotiations.
A failure to raise the US debt ceiling in time to meet a US$30b 15 November interest payment could technically constitute a US government default.
Modern history of US fiscal shenanigans would suggest the USD will attract ‘safe-haven’ demand as uncertainty rises and risk aversion takes hold. This poses downside risks for the ‘high-beta’ NZD. However, with medium term fundamentals still supportive, dips in the NZD/USD are still buying opportunities in our view. Look out for our more detailed strategy note today.
The Bank of Japan meeting is the lone item on the data calendar today. Another ‘on-hold’ decision is expected. And with tonight’s US non-farm payrolls being canned, the stage is set for a quiet end to the week. We’d expect the 0.8250/0.8350 range to contain the kiwi.
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Majors
Overnight price action in FX markets has been remarkably similar to the night before. The USD has continued to dribble lower, led by USD/JPY. Meanwhile, the European currencies – NOK, SEK, CHF, and EUR – continue to ride the wave of improving European economic activity.
Creeping worries about the US debt ceiling are starting to unnerve investors. There was no progress made in yesterday’s meeting between the US President and Congressional leaders. The US Treasury said a US default could cause a recession worse than 2008 and IMF chief Lagarde said a failure to raise the debt ceiling “would be far worse” than the government shutdown underway.
Equity markets have suffered another day of declines (S&P500 -0.9%), and the VIX index (a proxy for risk aversion) is now moving steadily higher. At 17.5%, it’s at the highest level since late June. During the 2011 debt ceiling debacle, it went above 40%.
With investors’ pulling their ‘risk’ horns in, the CAD, NZD, and AUD have again underperformed. We’d expect this to continue while generalised fiscal uncertainty remains. However, ongoing weakness in the USD continues to prevent outright falls in these currencies. And EUR and JPY continue to push higher against the struggling greenback.
Sliding US bond yields remain a weight on the USD. 10-year yields slipped back below 2.6% overnight as US economic data continued to underwhelm. The ISM non-manufacturing index registered a surprise fall (54.4 vs. 57.0 expected), overshadowing slightly better-than-expected jobless claims figures (308k vs. 315k expected).
Across the Atlantic the economic picture was a little more encouraging. The EU final services PMI and retail sales figures generally made for happy reading, helping EUR/USD hit another 9-month high of 1.3640 (from 1.3580). According to our momentum model, momentum is now clearly working in favour of the EUR/USD, and this will remain the case while the currency trades above 1.3462. The same cannot be said for the USD – the model is short the DXY index, USD/JPY, and USD/CHF, and long NZD/USD, AUD/USD, and GBP/USD.
For today, there is little to get excited about on the event calendar. The BoJ meeting should be uneventful and tonight’s non-farm payrolls has been formally cancelled/postponed due to the shutdown. Expect more whippy, nervous trading, with the USD likely to remain under pressure. The next layer of support on the USD index is eyed around 79.15 (current 79.75).
Other News:
*Moody’s revises the outlook on Italy’s sovereign rating to negative due to political instability.
*Chinese ‘official’ non-manufacturing PMI rises to a 6-month high in September of 55.4 from 53.9.
Event Calendar:
Oct 4: CH HSBC services PMI; JN Bank of Japan decision; US non-farm payrolls; US more Fed speakers.
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