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NZD sold off on weak Chinese PMI data; commodity linked currencies continue to underperform; too early to see if momentum in emerging markets is temporary or permanent

Currencies
NZD sold off on weak Chinese PMI data; commodity linked currencies continue to underperform; too early to see if momentum in emerging markets is temporary or permanent

By Kymberly Martin

The EUR strengthened overnight whilst ‘commodity-linked’ currencies and the GBP underperformed. The NZD/USD trades at 0.6240 this morning.

There was relatively calm in risk sensitive markets on both sides of the Atlantic overnight, although commodity prices extended their fall. The WTI oil price is down a further 3%.

Concerns for the state of global growth, centred on China, continue to permeate, assisted by China’s disappointing manufacturing PMI yesterday afternoon.

This showed activity slipping further into contraction. The release took an immediate toll on the AUD.

From above 0.7080, the AUD/USD promptly fell to 0.7020. It has slipped further in the early hours of this morning, to trade at 0.7000 currently. Support is now eyed at the early-Sept lows circa 0.6900.

The NZD/USD also gapped lower on the China data release. It recovered last evening to poke its nose back above 0.6300, but has subsequently slumped back to 0.6240. It now trades at its lowest point since the ‘flash crash’ of late-Aug, that saw the NZD/USD briefly trade down below 0.6200.

The NZD may gain some respite this morning if Fonterra announces meaningful upward revision to its 2015/16 payout forecasts.

However, we continue to see any near-term rebound as an opportunity to reposition for further medium-term downside to the NZD/USD.  We continue to anticipate the NZD/USD will trade down to at least 0.6000, by early next year.

The NZD/AUD gained some ground yesterday afternoon following the China PMI data release. As anticipated, negative surprises are normally felt more directly by the AUD, providing some support for the cross. The cross has consolidated overnight between 0.8910 and 0.8930.

Manufacturing PMI data releases on either side of the Atlantic overnight failed to provide much surprise. This provided the opportunity for ECB President Draghi’s comments, from his quarterly hearing in Brussels, to capture most attention.

He said it was too early to tell if loss of momentum in emerging markets is temporary or more permanent, or what are the precise drivers of recent market turbulence. It sounded like a Bank reluctant to rush in with further stimulus.

But he reiterated the ECB “would not hesitate to act” if downside risks weaken the medium-term inflation outlook for the region. The EUR/USD appeared to be boosted by the sense that further policy easing, though possible, was not imminent. From 1.1120, the EUR/USD not trades at 1.1210.

Tonight, the German IFO survey will likely attract some attention, as will a handful of US data releases. These include durable goods orders and new home sales.


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Kymberly Martin is on the BNZ Research team. All its research is available here.

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