by Mike Jones
NZD
After spending most of last week dribbling lower, the NZD/USD has made a flying start to the week thanks to the weekend’s buoyant Chinese PMI figures.
Worries global growth could be losing steam undermined sentiment towards ‘growth-sensitive’ currencies like the AUD and NZD last week. Investors’ risk appetite continued to cool. Our risk appetite index (which has a scale of 0-100%) eased from 70% to 67.3% over the week.
Signs of slowing global demand also weighed on commodity prices. The CRB global commodity price index continued its trend decline, declining 1.9% last week. In our view, reduced commodities support remains a key downside risk facing the NZD/USD. See here for more details.
The uncomfortable mix of falling commodity prices and waning risk appetite overshadowed some good news on the domestic economy last week. As a result, the NZD/USD was unable to sustain bounces above 0.8200.
For this week, we expect an improvement in the global backdrop to support the NZD. The weekend’s jaw-droppingly strong Chinese PMI (53.1 vs. 50.8 expected) has certainly got things off to a flying start.
Fading worries about a Chinese hard landing has seen the AUD/USD open the week nearly a cent higher around 1.0440, with the NZD/USD not far behind around 0.8230 (from a Friday close of 0.8185).
A bulging global calendar of data and events should provide plenty more excitement for markets this week (see Majors). Should this week’s European and US economic data restore confidence in the global outlook, solid risk appetite would be expected to support the NZD/USD on any dips towards 0.8100.
Domestically, the data calendar is all but bare. Tomorrow, we get the March update on ANZ commodity prices, while Wednesday morning sees the latest Fonterra dairy-product auction. We’ll be hoping for some consolidation in milk prices after the 4.5% slump a fortnight ago.
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Majors
Markets ended last week in a positive frame of mind. Equity markets and commodity prices pushed higher on Friday, undermining the “safe-haven” appeal of the USD.
Quarter end flows ensured Friday was a fractious, choppy session in currency markets. All eyes were on the European finance ministers’ meeting.
As expected, the EU firewall was increased, to €800b. Along with a hefty €27b in budget cuts from Spain, this underpinned investors’ risk appetite and helped the EUR outperform. Indeed, the EUR/USD ended the night ½ cent higher around 1.3350.
The EuroStoxx 50 rose 1% on Friday to finish the quarter up 6.9%. US and Japanese stock indices notched up similarly impressive quarterly gains of 6.2% and 19.3%, respectively. Renewed confidence in the global economy and buoyant risk appetite were certainly powerful tailwinds for asset markets through Q1.
This week’s slew of economic data and central bank meetings will help determine whether this confidence can be sustained.
Saturday’s Chinese PMI should ensure risk appetite starts the quarter on the front foot. The jump in the headline PMI index to 53.1 was well above analyst expectations of 50.8, and amounts to the highest since March 2011.
The data should help dispel lingering fears of a Chinese hard landing and bolster sentiment towards the commodity-linked currencies. Indeed, the AUD/USD has opened the week almost a cent higher around 1.0440.
The RBA, BOE, and ECB all meet this week, while the Fed releases the minutes from its March 13 meeting.
No change in policy rates is expected from anyone, but the RBA has perhaps the most potential to surprise. Markets had priced a roughly 50/50 chance of an RBA rate cut on Friday, but we’d expect this to be wound back today following the weekend’s surging Chinese PMI.
Wednesday morning’s Fed minutes will provide additional insight into the FOMC’s upgraded US economic outlook. Still, a smattering of downside risks in the statement will likely stop markets getting too carried away.
Along with central bank action, a bunch of heavyweight US data releases will occupy market focus this week. Solid outcomes from tonight’s ISM manufacturing survey, February factory orders, and Friday’s non-farm payrolls (+205k jobs expected) should help assuage last week’s concerns that the US recovery could be starting to sputter.
All up, we expect this week’s data to bolster confidence in the global outlook, underpinning investors’ risk appetite and keeping the ‘safe-haven’ USD under pressure.
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