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NZD poised for new high against the USD, VIX spurts higher on eurozone news, mixed messages for AUD, eyes on US earnings

Currencies
NZD poised for new high against the USD, VIX spurts higher on eurozone news, mixed messages for AUD, eyes on US earnings

by Raiko Shareef

NZ Dollar

The NZD failed to breach the post-float high against the USD yesterday, falling just three points shy.

Nevertheless, NZD/USD remains elevated, effectively unchanged for the day at 0.8820.

The NZD/USD remains poised for another crack at the high, though in the absence of any potential triggers, it may be frustrated today.

Also weighing against a topside break is an overlay of risk aversion across markets .

The AUD fell yesterday on the back of mixed AU employment numbers and soft Chinese trade data. This pushed NZD/AUD as high as 0.9410, before falling back. It remains 0.2% higher for the day at 0.9390. This puts it on the cusp of breaking resistance at 0.9400 in a sustained fashion. Following that, 0.9480 is the next stop.

We consider NZD/AUD fairly valued around 0.9350, taking into account interest rate differentials, relative terms of trade, and relative business confidence.

As such, we struggle to make a case for the cross to be fundamentally higher.

Today’s local releases (food prices, non-resident bond holdings) will attract little notice. It should be a fairly quiet end to the week.

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Majors

The USD reversed most of yesterday’s losses, benefitting from a safe-haven bid after a missed debt payment by a Portuguese banking name triggered concerns of contagion. The US Dollar Index is 0.2% stronger at 80.1.

Banco Espirito Santo lost 17% on Portugal’s benchmark index before trading was halted, after its parent company missed debt payments. While this may prove to be an issue specific to Espirito Santo, it sent a paroxysm of risk aversion through global markets. The Euro Stoxx 50 is 1.6% weaker, while the S&P500 fared better, down only 0.4%. Gold rose by 1.0%, and the JPY gained 0.4% to 101.3. Emerging market currencies are broadly weaker against the USD (though IDR is notably stronger on early polls indicating a Widodo victory in presidential elections).

This makes yesterday’s mild equity market relief rally look a little bit premature. Clearly, with indices around record highs and valuations looking stretched, investors are nervous about what might be around the corner. The VIX ‘fear index’ opened at 13.22, its highest level since mid-May, before easing back through the day.

EUR’s decline was not helped by soft macroeconomic data released earlier in the session. After Monday’s disappointing German industrial production figures (-1.8% m/m), the rest of the Eurozone is showing some signs of solidarity. Italy fell -1.2%, France fell -1.7% and the Netherlands slumped -1.9%. For France – the second largest economy in the EZ - that's the third month out of five this year which has seen a fall. The cumulative decline is -2.3% since January. EUR/USD is 0.3% weaker at 1.3600.

Yesterday, there were mixed messages from Australia’s labour market report. But in the end, the headline deterioration in the unemployment rate seemed to determine the AUD’s path.

Compounding the lucky country’s woes, China’s June trade data were disappointing, with both export and import growth weaker than expected. The AUD is 0.2% weaker against the USD, sitting just below 0.9400.

There is little on the data calendar tonight to really bother the market. Fed Speakers Lockhart and Evans lean toward the dovish end of the FOMC spectrum, but are non-voters this year.

Rather, we expect markets will prefer to watch corporate earnings results for cues on equity market direction.

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