While geopolitics weighs on Eurozone, US markets outperform, locals on Fonterra watch

by Raiko Shareef

NZ Dollar

The NZD edged lower in a largely quiet night for currency markets, with the NZD/USD just 0.1% weaker at 0.8550.

In the absence of any real market-moving data, the NZD was left to drift in a fairly tight range between 0.8530 and 0.8570.

For the moment, the currency seems to be looking for reasons to trip further lower.

Momentum favours that move, with our model now short NZD against all the TWI currencies.

And from the fundamental side, our short-term ‘fair value’ model suggests that NZD/USD should within a 0.7910 – 0.8480 range.

But unless Fonterra decides to deliver its dividend announcement (with an updated payout forecast) today, then those hoping for a break either way might be out of luck. Testing support at 0.8500 looks like too much of a stretch. We see initial resistance at 0.8620.

The NZD/AUD continues to stabilise just above key support at 0.9060, which would mark a full retracement of the 4 June to 11 July rally.

Our ‘fair value’ model supports the shunt lower, indicating a range of 0.8960 – 0.9160.

But short-term interest rate differentials (the single best indicator of NZD/AUD) on their own suggest a number closer to 0.93.

Should this downward move fail to gain further traction, we would be looking to enter a tactical long position.

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Majors

A night of thumb-twiddling for currency markets, with none of the majors moving more than 0.2% against the USD. No wonder, too, with the key risk events for the week only due to begin on Wednesday.

Geopolitics are still weighing on the minds of investors, as Western leaders agreed to push ahead with further sanctions on Russia. The US, the UK and the EU are looking to broaden sanctions to target sectors of the Russian economy (rather than just individuals or companies), with the aim of punishing Russian President Putin for not withdrawing his alleged support for separatists in the Ukraine.

Compounding Putin’s woes, an international tribunal has ordered Russia to pay $50 bln to the majority shareholders of Yukos, formerly the country’s largest oil company before it was effectively seized by the government. The RUB is off by 1.0% against the USD.

European equities are in the red, as concerns mount over the implications for growth of a tit-for-tat sanctions war between Russia and Western Europe. The Euro Stoxx 50 is down 0.1% for the day, with Germany’s DAX 0.5% lower.

US equity markets outperformed their European peers, shrugging off earlier losses stemming from disappointing home sales data. Pending home sales fell 1.1% m/m in June, against expectations for a 0.5% rise. Elsewhere in US data, the Markit Services PMI trumped analyst picks to remain at 61.0, while the Dallas Fed Index rose broadly in line with expectations. The S&P500 is currently up 0.1%.

Despite some more US data releases tonight, we don’t expect too much action, as these pale in comparison to those due later in the week.

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