By Mike Burrowes
NZD
The NZD/USD traded in a tight range of 0.8260 to 0.8320 overnight with little direction.
The currency was torn between rallying on an improvement in global risk sentiment versus falling against a stronger USD.
NZD/USD is currently trading at 0.8280.
Sentiment overnight was supported by better US data. The S&P500 and Euro Stoxx 50 index gained 0.8% and 1.8% respectively. However, the USD was better supported as the market trimmed expectations of QE3 from the Fed (see below).
Yesterday’s NZ trade balance showed an unexpected surplus of $129m (vs. 150m deficit). The surplus was driven by a large fall in oil imports. The data does not alter our view on economic activity. We still like the chances of a solid 1.1% gain in Q3 GDP, following the 0.4% we’re picking for Q2.
The data had no discernable impact of the currency. However, NZD/USD shed around ¾ cents to 0.8280 during the day as risk sentiment eased. We noted some decent selling of the NZD from proprietary and macro accounts during the day.
Trading on the NZD crosses was subdued overnight. NZD/AUD has moved back to 0.7900, from around 0.7950 yesterday. The next big event risk for the cross will come on Friday when RBA Governor Stevens testifies to a parliamentary committee. Whether Stevens endorses traders’ expectations for a rate cut will determine direction in the near-term for the cross.
Trading on NZD/EUR was directionless overnight, currently trading at 0.5740. NZD/GBP was slightly more interesting, marching from 0.5020 to 0.5050 currently. The cross was spurred higher by a weaker GBP overnight (see below). The recent action by the Japanese to weaken the JPY has helped NZD/JPY recover somewhat overnight, currently trading at 63.75 from around 63.40 yesterday morning.
Looking to the day ahead, we have the release NZ retail sales for Q2. We expect the data to show a further 0.6% expansion in volumes. The ex-auto component gain will probably be stronger still. For the day ahead, we see initial support for NZD/USD at 0.8230 and resistance at 0.8320.
Majors
It was a relatively quiet night in FX markets with most currencies trading in tight ranges. The USD was torn overnight between falling on improved risk sentiment versus rallying as the market pared back expectations for QE3. Overall, the USD index is marginally higher over the past 24 hours, currently trading at 74.00 from 73.90 yesterday.
The trimming of QE3 expectations and improved risk sentiment has seen US yields surge higher. The 10-year US government yield rose from 2.15% to 2.29% currently.
The 'safe haven' bid for Gold has waned again overnight, with spot falling from USD1830 to 1759 per ounce. Over the past 2 days, Gold is down over 7.3%.
The market has trimmed expectations that US Federal Reserve Chairman Bernanke will announce QE3 at his Jackson Hole speech on Friday evening. Helping to temper expectations was comments from the Fed’s Fisher, noting “enormous costs” to QE3 with little benefit. This adds to recent comments from other Fed members around the likely limited impact of QE3. We still expect Bernanke to outline the potential options the Fed can employ to support US growth, but stop short of announcing QE3. Following Fisher’s comments, EUR/USD nose-dived from 1.4460 to 1.4400, currently trading at 1.4420.
Better-than-expected US durable goods data for July (4% vs. 2% expected) led to a brief period of USD selling early this morning, although the moves were relatively small. EUR/USD jumped from 1.4420 to an overnight high of 1.4480 on the data. The US data spurred hopes the US economy will not enter another recession.
GBP/USD pared-back some of its recent gains overnight. The recent rally in GBP/USD to 1.6600 was largely attributed to investors perceiving the UK as in a better economic position than the US or Europe. However, overnight the better US data and a cleanout of recent long GBP positions saw GBP/USD splutter from a high of 1.6530 to 1.6370 currently. The next key event for the GBP will come on Friday with the release of Q2 UK. The market expects the data to show sluggish growth of 0.2%.
The Japanese government continues to wage war against the strong JPY. Overnight they appear to have had some impact, with USD/JPY strengthening from around 76.60 to 77.00. Yesterday, the Japanese announced a USD100 bn credit line for Japanese companies investing overseas. This will insulate these companies from the strong JPY. For now, we think currency intervention will only help slow the appreciation. It will take a recovery in the USD and risk sentiment for the JPY to weaken significantly.
Looking to the night ahead, expect the focus to remain on what policy options US Federal Reserve Chairman Bernanke will discuss in his speech on Friday evening. Data wise, the market will look to the release of German consumer confidence for any further signs the Eurozone debt crisis is denting sentiment in the ‘core’ economies. In the UK, the highlight will be a speech by the Bank of England Weale. Initial jobless claims are due for release in the US.
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See our interactive swap rates charts here and bond rate charts here.
Kymberly Martin and Mike Burrowes are part of the BNZ research team.
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