Surprise that NZD has outpaced the AUD in the move downward; EU PMI's 'ugly reading'

By Raiko Shareef

NZ Dollar

The NZD led the commodity-linked pack lower last night, with NZD/USD weaker by 0.6% to 0.8070 this morning.

It is a little surprising that NZD has outpaced the AUD in the move downward, since the focus in markets has been on hard commodity prices and Chinese growth.

These would tend to weigh more heavily on AUD than NZD.

Should those factors weaken further, we would expect the normal dynamic to reassert itself, and the NZD/AUD to benefit.

Part of the NZD’s weakness overnight likely stems from some apprehension about what Fonterra might announce as part of its annual results this morning. As we noted yesterday, should Fonterra deign to update its 2014/15 payout forecast (and it is likely that it will do so), we envisage a downgrade from the current $6.00 toward our forecast of $5.50.

While there are no formal polls, we think the market is expecting a number slightly below $5.50.

This morning’s trade balance data will gain a bit less attention, but has the potential to be market moving if the deficit is significantly larger than the $1.1b expected.

Today, we see initial support ahead of the 0.8000 big figure, and resistance at 0.8120.

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Majors

Commodity-linked currencies remain under pressure against the USD, despite a modest bounce in a Chinese manufacturing gauge. EUR managed to keep its head above water despite downbeat PMI releases. The USD continues to grind higher, with the Bloomberg Dollar Spot Index up 0.1%.

As discussed yesterday, the HSBC flash PMI for China was hotly anticipated, with the market dreading a poor result. As it happened, the measure bounced from 50.2 to 50.5, beating expectations of a slide to 50.0. While hardly a full offset to the negative news flow around China’s growth prospects, it did provide some mild relief on the hour, with AUD heading back above 0.8900.

But these moves were short-lived, with AUD investors keeping an eye on metals prices, which continue to print new cyclical lows. Iron ore fell another 0.5% yesterday, and the London Metals Exchange Index is off by 1.4%. The latter is a key component of our NAB colleagues’ AUD ‘fair value’ model. AUD/USD is 0.3% weaker for the day at 0.8840, a fresh six-month low.

Assisting this move lower in high-yielding currencies (NZD, AUD, BRL the biggest losers on the day) was a tick higher in market volatility.

The VIX Index rose to its highest since early August, as markets noted the step up in American-led military action against ISIS in the Middle East.

Equity markets suffered, helped by US moves to block tax inversion deals. This weighed on the healthcare sector in particular.

In Europe, the flash estimates of September PMIs made for ugly reading. The headline euro-zone manufacturing index slipped from 50.7 to 50.5, and the headline services index also edged lower, from 53.1 to 52.8. France continues to underperform Germany, with the former’s manufacturing index in contractionary territory for the fifth consecutive month. It is slightly surprising, then, that EUR managed to hold its ground, sitting 0.1% for the day at 1.2860.

It is a fairly quiet day ahead in terms of data flow, with investors likely to remain watchful for China- or commodity-related news. The RBA’s Financial Stability Review could prove interesting, should Governor Stevens choose to indicate that the RBA is considering macro-prudential tools to curb house price inflation. So far, the RBA have shown little interest in such tools, but the debate is gaining momentum in Australian financial circles. The introduction of macro-prudential tools would push the prospect RBA rate hikes further into the future, and likely erode support for the AUD, at the margin.

Other news:
* US Markit manufacturing PMI printed 57.9 vs 58.0 exp.
* US Richmond Fed manufacturing index +14 vs +10 exp.

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