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NZ$ struggling to get back above 70.5 USc as economic downturn fears grow

NZ$ struggling to get back above 70.5 USc as economic downturn fears grow
<p>NZ$ and A$ worst performing in the last week</p>

By Mike Jones*

NZD/USD finished even weaker on Friday, closing near 0.6880, to finish the week down 3.67%.

Fears that global growth is faltering had leverage-currencies falling against safe-haven currencies like CHF and JPY. The US data were weak (and not just in Friday’s payrolls). China’s PMI slowed more than expected, while European countries committed to fiscal austerity.

All of this took its toll on risk assets and risk currencies. Given this backdrop it was no surprise AUD and the NZD were the two worst performing primary currencies last week. Sentiment was further dented by weakness in global commodities with the CRB index falling 0.68%.

The NZD had started the offshore session on Friday on an encouraging note. However, this did not last long with the generally poor US data, falling Financials and commodities all weighing on the local currency.

While some Asian buying was noted , the weight of “ risk off “ sentiment saw the NZD eventually breach the 0.6900 mark to close near its lows. Given the general attitude to risk right now it is hard to see the NZD/USD back above the 0.7050 region, short term.

The local data week is dominated by Tuesday morning’s Quarterly Survey of Business Opinion. We expect this to be generally solid, as other business surveys have been of late. It will be particularly important, however, for testing the degree of GDP pick-up in Q2/Q3, as well as whether spare resources are being soaked up.

In this respect, the “difficulty in finding staff” series will be important, given the volatility in the “official” labour market data over recent quarters.

Also bear in mind QSBO pricing intentions will probably be starting to reflect the impending (1 October) GST hike.

Fonterra’s Wednesday morning (NZT) dairy auction will also be worth watching. Will prices withstand the recent global wobbles, including around China?

The local market will also be keeping a watching brief across the Tasman this week with the RBA rate decision on Tuesday. While the RBA is expected to keep rates on hold the market will pay close attention to see if the RBA shares any of the market’s concerns that global growth is starting to taper off.

Majors

The first Friday of the month was dominated, as usual, by the release of the US Employment Report. After the huge disappointment of the May numbers – when stripping out temporary census hires saw no private sector jobs created – markets had become increasingly nervous about a repeat performance in June.

The ADP report had signalled a very flat labour market, whilst the ISM Manufacturing Survey had shown a 2.1 point drop in the employment index, albeit still consistent with good expansion of the workforce. In the event, the headlines showed a 125k drop in non-farm payrolls but, with 225k job losses related to the end of the census, private payrolls improved +83k, compared to expectations of zero and worst-case scenarios showing losses of up to 100k or even 200k.

The detail of the report was somewhat less promising, however, with a modest decline in the length of the factory workweek and a -0.1% drop in average hourly earnings; the first time this series has ever printed in negative territory. Markets were initially unsure on what to focus: is the US economic glass half full or half empty? Trading at 1.2545 immediately prior to the data release EUR/USD lurched between 1.2536 and 1.2588, whilst AUD/USD swung from 0.8423 to 0.8473.

Over in the stock market, S&P 500 futures jumped 9 points to a spike high of 1032.7 then shed 14 points in less than two minutes to 1017.2. But the “risk-on, risk-off” approach for stocks and currencies has broken down for the US dollar against EUR and GBP over the last couple of weeks, even if it is still largely intact for the AUD. Poor US numbers are currently seen as dollar negative, rather than the old relationship of bad numbers = lower stocks = a higher USD.

Although the payroll headline results were not as bad as feared the details certainly suggested a waning degree of recovery. For the week ahead, US numbers become infrequent after today’s Independence Day holiday, with only the ISM Services report on Wednesday of any note.

In Europe, Thursday brings policy meetings for both the BoE and ECB. We expect no changes to be announced in either the price or quantity of money (via QE programmes).

After beginning Q3 on something of a high note, it remains to be seen whether the EUR and GBP can sustain their very impressive recent performance. EUR/USD1.2450 still provides an important technical pivot, above which the Single Currency looks well bid on continued short covering, with potential up to the 1.27-1.28 area before its decline then resumes.

* Mike Jones is part of the BNZ research team. All its research is available here.

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