by Mike Jones
NZ Dollar
The NZD outperformed overnight, in what was a fairly lacklustre session for currency markets. At around 0.8300, the NZD/USD is only a smidge higher than this time yesterday.
Markets are essentially treading water ahead of the ECB meeting and US employment report, both due later in the week.
The NZD more or less shrugged off this morning’s fall in global dairy prices. Average prices fell by 1.8% at auction, a result well within the bounds of expectation. We suspect a lift in global milk supply was behind the mild price decline. Note that prices remain at a very elevated level compared to history and around 41% higher than a year ago. As such, there is no threat here to current season milk payout forecasts.
Yesterday’s RBA statement was only really notable for the ramping up of its exchange rate rhetoric (in a similar vein to last week’s RBNZ statement). Rates were left at 2.5% as everyone expected. The line that the AUD was “uncomfortably high” had the market (briefly) reassessing its view of RBA rate hikes in late 2014.
The RBA’s jawboning efforts have seen the NZD/AUD mostly grind higher over the past 24 hours, helping underpin the kiwi dollar more generally. Near-term, we wouldn’t be surprised if the gains in the cross continued, particularly if this morning’s NZ labour market data (10:45am) is as positive as we expect. Still, short-term resistance at 0.8770 may be a tough nut for the cross to crack.
We are projecting a 0.4% increase in Q3 HLFS employment. Alongside a broadly unchanged participation rate, this is expected to result in the unemployment rate edging lower from 6.4% to 6.3%.
Along with the labour data, keep an eye out for the weekly RBNZ mortgage approval figures at 3pm. Any signs of weakness here would likely be used by speculative investors as an excuse to add to NZD short positions.
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Majors
Currency movements were a bit of a mixed bag overnight. The USD continued its trend recovery (DXY +0.2%), although this was assisted by another slump in the EUR. The NZD and GBP have been the only currencies able to buck the stronger USD trend.
Relative fundamentals continue to move against the EUR. A downgrade of the European Commission’s growth forecasts overnight added to fears the European economic outlook is deteriorating and ECB policy easing is needed. The EC’s 2013 forecast was left at -0.4%, but the 2014 estimate was trimmed from 1.2% to 1.1% – with downside risk.
European stocks slipped 0.3% (DAX) to 0.8% (CAC 40), with the weakness soon spilling over into the US session. The Dow Jones and the S&P500 are both down very slightly (0.01% and 0.2% respectively) and the VIX index (a proxy for risk aversion) is a little higher, and hit an overnight high of 13.6%.
But while Europe remains mired in low and slow growth, US data continues to suggest the economy is showing resilience to the October government shutdown.
The US non-manufacturing PMI ticked up to 55.4 in October, above the 54.0 expected. The employment sub-component bounced from 52.7 to 56.2, bolstering hopes for a solid non-farm payrolls number on Friday.
Against this backdrop, 10-year US bond yields continued their slow recovery, rising from 2.61% to 2.66% overnight (and now 19bps above last week’s 2.47% low).
The clear divergence in EU/US fortunes saw the EUR slide from above 1.3500 to almost 1.3450 overnight. A quick glance at the recent fall in EU-US 2-year swap differentials suggests the EUR’s decline could extend as far as 1.3300. However, traders may well be reluctant to place additional bets on EUR depreciation ahead of Thursday’s ECB meeting. While speculation is mounting Draghi will announce a rate cut, we think it is more likely he will hold off until December. If so, a brief short covering bounce in the EUR seems likely.
Other news:
*The HSBC Chinese non-manufacturing PMI rises to 56.4 from 52.4
*Italy Finance Minister Saccomanni says an ECB rate cut was possible by the end of the year, and the strong EUR poses risks to recovery.
*UK services PMI spikes to the highest level in 15 years (62.5 vs. 60.0 expected), underpinning the GBP/USD’s bounce back above 1.6000.
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