NZ$ down on global fear and on weak NZ manufacturing; wholesale interest rates down another 10 bps on lower OCR outlook
By Mike Jones*
Yesterday’s slump in July’s PMI (to 49.9, from 56.2 in June) was a bolt from the blue, and a material disappointment.
Set against a soft housing market and generally lacklustre consumer spending, we were looking for the manufacturing sector to keep lending a firm hand to the economic recovery. As it was, yesterday’s PMI was the latest in a number of indicators to question the pace of NZ’s economic recovery. From that perspective, it was perhaps not surprising to see markets continue to peel back the extent of RBNZ tightening expected this year, and the NZD/USD take out the title of worst performing currency overnight.
Yesterday’s near 10bps drop in 3-year swap rates saw the spread to the US equivalent crunch in to around 300bps overnight, from highs of close to 330bps last week. The reduced yield appeal has tended to weigh on the NZD over the past 24 hours.
Overnight, generally dour sentiment in offshore markets added to the downward pressure on the NZD. Last night’s US jobless claims figures and Eurozone industrial production data for June were the latest in a long string of global data to undershoot analysts’ (arguably optimistic) expectations.
Equity markets and commodity prices were pushed lower as a result. The associated paring of investors’ risk appetite bolstered demand for “safe-haven” currencies like the USD at the expense of higher yielding currencies like the NZD and AUD. After starting the night around 0.7150, NZD/USD was eventually squeezed below 0.7100, for the first time since 21 July. Today’s retail sales figures will be full of mixed messages. As ever, the quarterly ex-inflation number will be the one to watch. We expect a 0.1%q/q expansion. A result close to our pick would certainly not provide any respite for the NZD/USD. Initial support is seen around the 0.7030/50 region, but a convincing break below this level will suggest a deeper pull-back towards 0.6900 is on the cards.
Majors
The USD strengthened against most of the major currencies overnight. Still, currency movements were relatively muted overall, at least compared to the carnage of the previous day. Heightened risk aversion was again the main theme in financial markets last night. Data released over the past 24 hours has done nothing to soothe investors’ fears the global economic outlook is beginning to sour. Yesterday, the Australian unemployment rate unexpectedly rose (to 5.3% in July vs. 5.1% expected), and Japanese industrial production data for June recorded a second consecutive monthly decline.
The economic news overnight wasn’t much better. The dismal state of the US labour market was highlighted by a further pick-up in US jobless claims (to 484,000 in the week to August 7, compared to the 479,000 expected), to the highest level in nearly 6 months. Eurozone industrial production undershot expectations (-0.1%m/m vs. +0.6% expected) and terrible Greek GDP and unemployment data reinforced the headwinds fiscal austerity poses for many European economies. The more pessimistic mood saw global stocks post their third consecutive day of losses.
European bourses were mostly down around 0.3%, while US stocks slipped 0.5-0.8%. The VIX index (a proxy for risk aversion) briefly hit 3-week highs of around 26%. Against a backdrop of renewed caution about the global economic recovery and fading risk appetite, safe-haven” currencies like the USD and CHF remained in hot demand.
Renewed concern about the health of peripheral Eurozone countries saw EUR/USD spend the first part of the night drifting lower (5-year Greek CDS widened to 795bps, from 750bps at the start of the week). However, support at 1.2780 held, and the single currency finished the night above 1.2800. GBP, AUD and NZD also posted modest declines against the firmer USD. The JPY failed to capitalise on the generally risk averse environment, amid yet more verbal intervention from Japanese officials.
Indeed, USD/JPY climbed from 85.00 to almost 85.90.
Market chatter suggested the Bank of Japan was checking foreign exchange rates with banks (often seen as a precursor to intervention) and Prime Minister Kan decried the JPY’s recent rise as "rough". Looking ahead, the current backdrop of rising risk aversion and softer equity markets should ensure dips in the USD index are limited to 82.10 in the short-term. Resistance is eyed towards 83.20.
* Mike Jones is part of the BNZ research team.
All its research is available here.
No chart with that title exists.
2 Comments
What conclusion? I was pointing out the fallacy in the idea of economic self-sufficiency. I said nothing about cheap jobs - what ever that means.
Say our foreign customers decided they want to become "self-sufficient" in their own wine production? What do we do? Shut down all our wineries? This line of thought leads only to self-defeat.
Secondary, foreign capital is not the problem. One, if the capital market in New Zealand is not large enough to support local business when they try and grow into larger markets what options do we have? Two, it is better to have a share of a large successful enterprise than complete ownership of a small nothing business.
Statements like "rethink" economics are purely throw away lines. Meaningless - the fundamentals of economics will stay the same. Inward change will be pointless in the context of the large world. Changes to our attitude and approach and the support we give each other, are more important.
In contrast I think we are successful now, our business are doing well in general. But, we can do more - stop complaining and come up with new business ideas, support the business who are trying to grow, invest money in productivity rather than static property.
Realistically we need to make choices. Wishes, even those made in government don't work with out action.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.