By Mike Jones*
The NZD has spent the past 24 hours further consolidating a trading range based on the US69cent mark.
The Kiwi was not really the focus of the market, and the All Whites efforts have even been knocked off the front pages, upstaged by the Swiss dismissal of the highly fancied Spanish team.
Nevertheless, an ongoing recovery in equity markets and risk appetite ensured the NZD was well supported. Once again global markets have spent the overnight session in a generally positive frame of mind. Across Europe and into Wall Street equity markets have posted marginal gains while the CRB and oil prices held yesterdays gains as concerns over the strength of global demand continued to abate.
As mentioned yesterday global equity markets and investor sentiment remains the major driver of the NZD at present.
As such, further Asian equity markets gains today should keep the NZD on a firmer footing and likely to challenge resistance in the 0.7020/0.7040 window. This is certainly the risk suggested by our short-term NZD/USD valuation model.
The model suggests the current combination of NZ commodity prices, NZ-US 3-year swap spreads, global growth expectations, and risk appetite is consistent with a short-term “fair-value” range of 0.7150-0.7350 in NZD/USD. For today, solid support is eyed towards 0.6940/0.6960.
This afternoon we get an update on local Consumer Confidence with the June update of ANZ’s Index (last at 126.0).
Majors
The stability across markets belies some of the drama unfolding in European corridors of power. The overnight session has continued to focus on Spanish issues.
Ongoing rumours of the EU preparing some sort of large financing package for Spain once again made the rounds early in the European session, prompting denials from a broad range of Spanish and European officials.
Prior to the US open traders focused on a German press article that stated that ECB Chief Trichet was demanding a clear commitment from EU government for aid to Spain in case its access to capital markets stumbles. We can suggest that the raft of official remarks from all manner of Euro Zone officials over the last three days that Spain does not have a funding problem as being so widespread and reactive that they are in danger of creating an issue where previously there was not one.
The culmination of all this is the EU has today had to deny a report in the Spanish newspaper El Economista that the EU, IMF and US Treasury are putting together a EUR250bn credit line for the Spanish government. European peripherals widened in session as the markets seemed to test the government resolve on potential turmoil and decided where there’s smoke there might just be fire.
The Spain/German 10-year Government Bond premium hit fresh Euro launch record level as it moved beyond the 220bps. Other peripheral spreads followed in tandem with Portugal/German Gov Bond premium at 305bps, wider by almost 20bps and the Greek/German Gov Bond premium nearing 700bps area (wider by almost 30bps).
Though, despite all this the EUR is steady at the US1.2300 level, somewhat mid range for the overnight session. In the US data releases were mixed; May PPI updates riper than forecast at 5.3% YOY while IP and CU updates improved as well. However, Housing Starts and Building Permits were poor as subsidy schemes ended.
Industrial Production grew 1.2% and Capacity Utilisation printed at 74.7% against forecasts of 0.9% and 74.5% respectively. Financial stocks are following proceedings on Capitol Hill closely. Some stocks struggling after Senator Lincoln confirmed that she would be "open to suggestions" on her bank derivatives business proposals. It appears likely that some form of Lincoln's amendment requiring banks to spin off derivatives desks will make it into the final financial regulatory overhaul.
Also to note that GSEs Fannie Mae and Freddie Mac have finally delisted their shares from the NYSE. We can suggest one key point about current FX market behaviour – indeed that of broader financial markets – is that it is acting like the proverbial shoal of fish – skittish and lacking conviction. Investors are aware of both sides of the story – the recovery in the global economy looks increasingly strong, if led by Asia, but uncertainty reigns on whether Europe’s travails and a possible over-heating in China will derail things.
Our big-picture view is the strength of the recovery will ultimately prevail that, but that is a view that may have to wait some weeks/months down the road to come about. In the meantime the lack of a short-term anchor lends itself to erratic and fickle markets. On the day we’ll pay some attention to UK Chancellor George Osbourne who is set to deliver some pretty unfriendly remarks to the banking industry at his Mansion House speech.
* Mike Jones is part of the BNZ research team. All its research is available here.
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