By Mike Jones
NZD
The NZD has been the strongest performing currency over the past 24 hours.
A bout of NZD/AUD buying, combined with a broadly weaker USD, saw the NZD/USD lift around ½ cent to 0.7850. The NZD/EUR climbed to within a whisker of last year’s 0.6170 all time high.
Yesterday’s flat Australian retail sales figures (compared to expectations for +0.4%) exposed a few chinks in the AUD’s armor. Australian interest rates tumbled across the curve in the wake of the data as the market moved to fully price a RBA rate cut in February.
Fading yield support and generalised AUD selling amongst commercial and custodial accounts weighed on the AUD. At the same time, NZD sentiment was steadied by November’s on-expectations trade balance figures (-308m vs. -300m expected). These contrasting trans-Tasman fortunes underpinned a march higher in the NZD/AUD yesterday, from 0.7640 to around 0.7690.
Overnight, movements in currency markets were fairly tame. The main feature of the night was a modest squeeze higher in the EUR as the speculative community pared some of its huge EUR 'short' position. With EUR gains knocking the USD onto the back foot, the NZD/USD was able to eke out further modest gains through the session.
We’ve just released our 2012 NZD Roadmap (attached). In it, we outline our view the NZD/USD is susceptible to a modest downward correction through Q1 as slowing global growth and ongoing European debt dramas act to suppress investors’ risk appetite and commodity prices. We also remind readers that January, and to a lesser extent February, are historically seasonally negative months for the NZD/USD and NZD/AUD.
For today, NZD/USD resistance will be encountered on bounces towards 0.7905, with initial support towards the overnight low of 0.7770. Keep an eye out for NZ building permits figures at 10:45am (market expectations+3.3%).
Majors
It’s been a slow start to the week in FX markets, with most of the major currencies tracking narrow ranges overnight. Nevertheless, the USD gave up some ground, led by a modest bounce in the EUR.
Traders spent much of the overnight session holding their breath for the outcome of the latest Franco-German summit.
In the event, there was little fresh news for markets. The French and German leaders discussed ways to boost growth in the Eurozone, and again warned Greece there would be no more bailout cash unless private bondholders share the pain of the bailout.
Still, there were enough snippets of positive Europe news to spur a mild short covering rally in the EUR (IMM data showed speculators increased EUR shorts to a record -139k positions in the week ending January 3).
First, France managed to issue an above-expectations €8.4b worth of bonds in its monthly refinancing operation. Second, encouraging German trade balance figures (€16.2b vs. €12b expected) buoyed hopes for a strong Q4 German GDP number and, third, IMF head Lagarde suggested the Eurozone may yet avoid a technical recession.
After starting the week below 1.2700, the EUR/USD climbed to almost 1.2780 before settling marginally lower. Before long, the EUR’s gains had kick-started a more general softening in the USD, and the GBP, CHF, and JPY had all notched up small gains against the dollar.
News Swiss National Bank Chairman Hildebrand had resigned (following his wife’s currency trading scandal) prompted some temporary strength in the CHF. However, the strength was quickly unwound after the SNB said it would continue to defend the 1.20 EUR/CHF floor with "the utmost determination".
Despite last night’s squeeze higher, we remain of the view the EUR will struggle to make topside progress this week. Solid resistance is eyed on EUR/USD rallies towards 1.2800. However, there is a lot of important events to watch out for that might help shape currency market sentiment.
Monetary policy decisions from the ECB and Bank of England will be closely watched, and a busy week for European sovereign debt issuance will provide a timely test of market confidence. Also keep in mind the US corporate earnings season kicks off today with Alcoa reporting after the bell. Analysts expect just 6.1% revenue growth for S&P500 companies.
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