by Mike Jones
NZD
After falling for 14 of the last 15 days, the NZD/USD finally found some friends overnight. In fact, the NZD was the strongest performing currency amongst the G10. However, at this stage, this looks to be driven more by speculative positioning than anything ‘fundamental’.
The week has begun with European doom and gloom taking a breather and investors feeling a little less negative about the global economy.
Hopes the EU may ride to the rescue with some ‘crisis fighting’ measures at Wednesday’s Summit, and some pro-growth comments from the Chinese Premier, have underscored a small recovery in risk appetite over the past 24 hours.
Global equity markets are higher, bond yields are rising off record lows and commodity prices have bounced. This broad stabilisation in the global backdrop prompted a mild squeeze on USD long positions overnight. And with the NZD having fallen the most in the recent bout of risk aversion, it also bounced the hardest overnight.
After finishing last week at around 0.7560, the NZD/USD has climbed to around 0.7630. Similarly, the AUD/USD was dragged from 0.9840 to around 0.9880 overnight.
It’s worth noting, last week’s IMM data showed the speculative community have slashed NZD net long positions to 2.6k – around 50% below the long-average. So there is room for a rebuilding of some of these net longs to propel the NZD even higher. However, whether or not this occurs will be highly dependent on some near-term event risk.
In particular, Fonterra’s first 2012/13 dairy payout forecast could hit the markets today (unconfirmed). As we’ve been warning about for a while, this is likely to be well down on the current season’s payout. We’re picking $5.80 (from the current season’s $6.80), with downside risk. This shouldn’t technically be ‘news’ given the partial dairy price information. However, the announcement effect has obvious potential to knock the NZD lower.
Keep an eye out as well for this afternoon’s (3pm) RBNZ survey of inflation expectations. Will the key 2-year-ahead expectations measure continue to fall (2.5% last quarter)? If not, it will be yet another factor abrading the notion of further OCR cuts.
Overall, we look for near-term NZD/USD support at 0.7555 to hold on the day. An extension of the rally into the 0.7670/85 window should elicit selling interest.
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Majors
It’s been a slow start to the week in currency markets. The absence of any more bad news from Europe has spurred some consolidation across markets. The USD index tracked a sideways 81.00-81.40 range.
Market chatter that European policy makers are drawing up a series of ‘crisis-fighting’ measures encouraged a modest recovery in risk sentiment yesterday.
Overnight, solid Eurozone construction figures (+12.4% vs. -3.8% expected) and soothing comments from Chinese Premier Wen kept the positive tone alive. Wen said "stable growth will be given an even more important position", boosting market hopes for more Chinese policy stimulus.
Global equity markets notched up small gains, commodity prices rallied (the CRB index is currently up around 1.2%), and the VIX index (a proxy for risk aversion based on the volatility of the S&P500) eased from 24.5% to 22.5%.
Against a backdrop of stabilising risk appetite and commodity price gains, pro-risk currencies like the NZD and AUD outperformed. In contrast, the EUR/USD chopped sideways in a narrow 1.2730-1.2815 range. Fading ‘safe-haven’ demand eroded some of the JPY’s appeal. USD/JPY climbed from 79.15 to an overnight high of around 79.45.
We suspect last night’s movements in currencies were mostly about profit-taking and positioning. Last week’s IMM data showed the speculative community now hold the longest net short EUR position on record.
Meanwhile, technical indicators suggest the USD is a little ‘overbought’. So perhaps what we are seeing is some mild profit-taking on USD long positions. This may continue in the short-term, particularly with investors a little wary of holding short positions in EUR and risk currencies into Wednesday’s EU Summit. Resistance on further EUR/USD bounces is sighted at 1.2820 and, through there, 1.2905.
Amongst the data on offer this week, European and Chinese PMIs will be worth keeping an eye on. These may well be weak, reigniting global growth worries and risk aversion.
Elsewhere, the Bank of Japan meet tomorrow and are widely expected to leave rates and asset purchases unchanged.
Lastly, it’s an important week for the GBP, with a slew of UK data due and the Bank of England minutes released on Wednesday.
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