''Frayed market nerves were soothed by murmurs of attempts to stitch together a Greek coalition''

by Kymberly Martin

NZD

A broad diminishing of risk aversion overnight helped the NZD/USD stabilise. It trades around 0.7860 currently.

The NZD showed limited response to the release of the NZ PMI yesterday. The PMI that has been on a rollercoaster over the past few months slipped to 48.0 in April from 54.5 the previous month.

This takes the manufacturing index into ‘contraction’ territory to join a number of its developed market peers.

Lower production and new orders were key contributors to the pullback. However, the data did little to ruffle the NZD that has already priced some loss of momentum in the NZ economy in its recent pullback.

The NZD’s movements also remain quite closely linked to developments in global risk appetite. To this end, the NZD was underpinned overnight as risk appetite stabilised (see Majors). The NZD/USD traded above 0.7900 before returning to trade at 0.7860.

The NZD/AUD took its direction from the release of the solid AU employment report yesterday afternoon (see Majors).

As the AUD surged higher the NZD/AUD gapped lower from above 0.7810 to around 0.7785. It has subsequently maintained trading around this level for most of the night. Key for the cross today will be Chinese data releases this afternoon/evening (NZT).

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Majors

An uneasy calm settled over markets overnight, helping to support demand for “riskier” assets and currencies. Generally, trading ranges were quite tight however. The USD index currently trades at 80.10.

Overnight, equity markets posted modest positive returns and our risk appetite indicator (scale 0-100%) inched higher form 53% to 57%.

Frayed market nerves were soothed by murmurs of attempts to stitch together a Greek coalition that would avoid the necessity of further elections. The market also took positively news the Spanish government will take over struggling Bankia SA.

In this backdrop, the USD was fairly range-bound, sidling around the 80.10 level. Trading in the EUR/USD was similarly contained, trading around 1.2950 at present.

There was a little more action in the GBP. Ahead of the Bank of England meeting the GBP/USD had dipped from 1.6140 to below 1.6100 as the market anticipated some chance of further quantitative easing. In the event, the Bank of England left interest rates at 0.50% as expected, and left asset purchases unchanged at £325b. Consequently, the GBP/USD surged as high as 1.6180 before returning to trade around 1.6150 currently.

There was a small reversal in the fortunes of the AUD yesterday. Early afternoon the AUD/USD gapped higher from below 1.0060 to around 1.0090 after the market responded to the headline improvement in the AU unemployment rate. It fell from 5.2% to 4.9% in April (5.3% expected).

As always the devil was in the detail, and some of the fall in the unemployment rate was due to a drop in the workforce participation rate. Still, it started the AUD/USD on the front foot heading into the evening.  It was then underpinned by the general stabilisation in risk appetite. It touched above 1.0140 early this morning before drifting off to trade just below 1.0100 currently.

Combined with the AU Budget that was no more contractionary than expected, the employment report suggests to us that the RBA will not cut again in June. The market is still pricing a 60% chance of a 25bps cut.

Any shift in these expectations should help to underpin the AUD in coming weeks. For today, the key driver of the AUD will likely be Chinese data releases (CPI, Industrial Production, Fixed Asset Investment, Retail Sales and Industrial Production).

Elsewhere, all eyes will remain on European politics. Also tonight, the US University of Michigan Consumer Confidence survey is released.

All its research is available here.