by Mike Jones
NZD
The NZD has spent most of the past 24 hours scuttling lower. However, solid corporate and real money demand to buy the dip saw NZD/USD support at 0.8120 hold.
Yesterday’s surprise 50bps rate cut from the RBA whipped Australian markets into a frenzy. The AUD/USD plunged from 1.0400 to around 1.0320 in the wake of the decision. Australian interest rates tumbled across the curve as investors factored in a further 75bps worth of cuts this year.
Still, there was surprisingly little fallout from the RBA on the ‘Teflon Currency’. The NZD/USD simply wandered off from 0.8160 to around 0.8140, with a rocket higher in NZD/AUD helping to underpin the currency.
According to our short-term valuation model, NZD/AUD “fair-value” has moved higher following the RBA’s rate decision. NZ-AU 3-year swap differentials increased (became less negative) from -92bps to -84bps yesterday.
This has shifted NZD/AUD ‘fair-value’ up into a 0.7800-0.8000 range. As NZ economic growth slowly ‘catches up’ to Australia this year, NZ-AU rate differentials should continue to slowly move back towards positive territory. This narrowing in rate differentials underpins our forecast for NZDAUD to hit 0.8400 by year-end.
Looking ahead, the chances of additional RBA rate cuts are highly data dependent. Indeed, the lack of any forward guidance from the RBA yesterday suggests they are firmly in data watch mode. We’ve pencilled in another 25bps sometime in the next couple of months.
Overnight, a brighter update of the US ISM manufacturing index (see Majors) helped shore up sentiment towards the global economy.
Alongside recovering equity markets, the ‘growth-sensitive’ NZD began to climb again. Amid solid corporate and real money buying, the NZD/USD bounced off 0.8120 support to around 0.8160.
Another weak looking milk price auction was more or less shrugged off by the currency. To us, there was a strange sense of both relief and disappointment from the auction. Relief that average global dairy prices only fell 2.4% at this auction, following the 10.1% plunge in the previous event (revised from 9.9%). But disappointment that prices fell again, effectively locking in last time’s move.
Global dairy prices are now 30% below year ago levels. We see more downward pressure in the near term. Lower dairy returns will be a significant drag on NZ economic growth over the coming 12 to 24 months.
We will get an overall update on commodity prices with the ANZ index due for release at 1pm today (NZT). We expect world prices overall to be down about 3% in April.
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Majors
Encouraging global manufacturing data saw market sentiment brighten overnight. US equity markets are in the black to the tune of 0.4-0.7%, commodity prices are higher, and risk aversion gauges have eased.
The USD has strengthened against most of the major currencies, shrugging off its usual ‘safe-haven’ allure.
For the most part, it was a sleepy offshore session, with Europe celebrating the May/Labour Day holiday. Currencies spent most of the night chopping around familiar ranges.
However, that all changed following the release of the US ISM manufacturing survey. The April index beat analyst expectations (54.8 vs. 53.0 expected), rising to its highest level since last June. In response, US bond yields and the USD roared higher, as the strong numbers saw investors trim bets on further Federal Reserve easing.
US 10-year bond yields jumped 5bps to 1.96%, underpinning a spurt higher in the USD index from 78.65 to almost 79.00. The stronger USD took a toll mostly on the JPY and EUR. USD/JPY climbed from 79.80 back above 80.00, while EUR/USD plunged around ½ cent to around 1.3220.
The UK April manufacturing PMI survey disappointed the 51.5 consensus with a 50.5 reading – down from a revised 51.9 in March. While some knee-jerk GBP selling followed, there was little follow through, indicative of relative positive GBP sentiment. Indeed, we still see GBP as attractive against the EUR and view EUR/GBP bounces towards 0.8200 as selling opportunities ahead of Thursday’s ECB meeting.
Tonight brings the release of European manufacturing PMIs. The market is already braced for weakness here following the terrible ‘flash’ PMI estimates. So the risk is the PMIs could exceed expectations, thereby keeping positive sentiment intact. US factory orders for March and April US ADP employment numbers will receive some attention.
Overall, we suspect solid US economic momentum will help the USD index find reasonable support on dips towards 78.60. Initial resistance is seen at 79.20.
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