Weaker US corporate reporting adds to negativity

by Mike Jones

NZD

Despite a smattering of mostly encouraging NZ data, the NZD has been amongst the weakest performing currencies overnight. The NZD/USD shed around a cent overnight, to trade around 0.8175 currently.

According to yesterday’s NBNZ business survey, net confidence in the economy’s outlook was +35.8 in April, from +33.8 in March, while own-activity expectations were +36.1, from +38.8. These are very strong results in anyone’s books.

The activity expectations, in particular, remain consistent with GDP growth heading toward a 4-5% annual rate. And while yesterday’s trade balance figures underwhelmed ($207m surplus vs. $501m expected), they were overshadowed by a whopping 19.8%m/m rebound in residential building consents (seasonally adjusted).

The positive data kept the NZD in good heart yesterday, but it was a different story overnight. A modest paring of risk appetite saw ‘growth-sensitive’ currencies underperform as equity and commodity markets went into reverse (see Majors).

Heavy month-end JPY buying added to the pressure on the NZD, as NZD/JPY slipped from 66.00 to around 65.20.

Looking ahead, we’re bracing for a bit of volatility in the NZD over the next 24 hours, as a slew of event risk hits markets. This morning’s local Q1 LCI/QES reports should confirm reasonable wage growth, but will unlikely move the NZD.

More of the focus will be on the RBA meeting (4:30pm NZT) and the Chinese PMI (1pm NZT) – see Majors. We expect a 25bps rate cut from the RBA, but this is already priced in. As a result, the AUD and NZD/AUD will take their cues from the tone of the accompanying statement. We’ll need to see an overly dovish statement from the RBA, or a 50bps cut, for the NZD/AUD to rally on the day.

Keep an eye out as well for the milk price auction out tonight/early tomorrow morning. Following the 9.9% price drop a fortnight ago, we’ll be looking for any signs of a corrective bounce. Another fall would surely take a toll on the highly ‘commodity-sensitive’ NZD/USD. Initial support on the NZD/USD is eyed on dips towards 0.8120, with resistance at 0.8265.

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Majors

Currency markets continue to struggle for direction. Over the past few weeks, most of the major currencies have knocked around in sideways ranges as risk sentiment has ebbed and flowed.

Overnight, a mild deterioration in risk appetite saw the USD and JPY outperform at the expense of the ‘commodity currencies’ – AUD, CAD, and NZD. Still, volumes and trading interest were relatively subdued reflecting the European May Day holiday, the start of Golden Week in Japan, and month-end.

Last night’s economic data provided little to write home about. Spain was confirmed as entering recession in Q1, US regional (Dallas and Chicago) manufacturing updates undershot market expectations, and Canadian GDP data for February registered a surprise fall (-0.2% m/m vs. +0.2% expected).

Global equity markets slipped 0.4-1.9%, with a couple of weaker US corporate earnings reports adding to the negativity. Commodity prices also weakened as risk aversion gauges, such as the VIX, pushed higher.

This modest ‘risk-off’ tone encouraged demand for the ‘safe-haven’ USD and JPY at the expense of the higher yielding AUD, NZD and CAD. Heavy month-end selling of JPY crosses at the London fix added to the pressure on the commodity currencies. NZD/JPY, AUD/JPY, and CAD/JPY all slid a bit over 1%.

For today, the RBA rate decision and Chinese PMI data will be the focus, ahead of UK and US manufacturing data tonight. Australian markets are fully priced for a 25bps rate cut from the RBA, and price a 32% chance of a 50bps cut.

We continue to think a 25bps cut is the most likely outcome. Given this, we see scope for the AUD to rally on the day. However, much will depend on the tone of the statement. Should the RBA clearly pave the way for a series of cuts, the AUD may suffer.

A small increase to 53.6 is expected in the ‘official’ Chinese PMI today (53.1 last month), following the recent improvement in the flash HSBC estimate.  However, given investors’ creeping nervousness about the global outlook, markets are likely most sensitive to a downside surprise. Most of the fallout from such would be reflected in the AUD and NZD.

All its research is available here.