On little news, the USD is weaker against most of the majors, with the yen and NZD the best performing.
Equity markets have begun the week on a weak note, with concerns that Deutsche Bank will need to raise capital reducing market sentiment and dragging down financial stocks.
Investors are also nervous as recent polls put Clinton and Trump neck-and-neck ahead of this afternoon’s first US Presidential debate which kicks off at 2pm NZT.
USD indices are down in the order of 0.2%. USD/JPY is the biggest mover, down 0.7% to 100.3, again on the verge of testing support at 100.
Former Japanese MoF official Eisuke Sakakibara also known as “Mr Yen” was on the wires predicting that the Yen would continue to appreciate and that he would not be surprised to see USD/JPY at 90 by year-end. This view was based on monetary policy nearing its limits and in any case 95-100 would be “all right” for the Japanese economy.
We’ve often noted that the Yen is still one of the cheapest major currencies. Our current purchasing power parity estimate for USD/JPY is circa 92.50 or 64 on an NZD/JPY basis.
NZD is up 0.5% to 0.7280, with a larger than expected trade deficit for August having little impact. The NZD was under pressure at the end of last week following the RBNZ OCR review, but the dip has seen buyers return.
Yesterday we tweaked our 3 and 6-month NZD targets upwards by 2 cents to 0.72 and 0.70 respectively. Despite the prospect of weaker global risk appetite in more volatile market conditions into year-end, we think that strong domestic factors will remain supportive for the NZD.
NZD/AUD has bounced off a 4-week low of circa 0.9485 to be trading at 0.9530. We expect the cross to consolidate around this level over coming weeks and months.
EUR found some support following much stronger than expected Germany IFO business confidence indicators. These contradicted the fall in the services PMI on Friday. EUR/USD sits up 0.3% at 1.1260.
Speaking at Parliament in Brussels, ECB President Draghi repeated his refrain for politicians to boost fiscal spending and reform economies. The underlying message seemed to be that monetary policy had played its part, policy was reaching its limits and that “other policy actors need to do their part”. He also suggested that the UK shouldn’t be granted any special favours on single-market access during Brexit negotiations. GBP reached as low as 1.2917 overnight as fears mount for an early “hard” exit, but has since recovered to be flat at 1.2960.
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