by Mike Jones
NZD
The NZD has been unable to sustain yesterday’s probe higher. Indeed, the NZD/USD shed around a cent overnight as a bout of EUR/USD selling underpinned a mild strengthening in the USD.
Yesterday’s NBNZ business confidence survey certainly did NZD sentiment no favours. Net confidence slipped to 12.6, from 27.1, and own-activity expectations faded to 20.8, from May’s surprisingly strong 34.9.
Even so, the NBNZ business indicators remain consistent with economic progression – just not what you’d call a strong one. In this sense, the survey has essentially come into line with the measured 2-3% view we’ve held regards the NZ GDP expansion all along.
Overnight, it was once again all about the EU Summit and the EUR. A flurry of headlines and conflicting reports got the market excited at times, but investors are still waiting on official comment from policy makers.
In the absence of any material news, investors positioned for disappointment by selling the EUR. Indeed, a full cent was shaved off the single-currency.
Against a backdrop of heavy EUR selling, and generally dour risk sentiment (global equity markets and commodity prices are a sea of red), investors trimmed positions in the ‘risk-sensitive’ NZD/USD and AUD/USD.
The antipodean currencies both lost around a cent to currently trade around 0.7870 and 1.0030 respectively.
Bear in mind today’s NZ residential building consents figures will be following April’s 7% correction from March’s thunderous 20% jump. So any small fall could be forgiven.
The credit aggregate figures also released today should show flickers of life. As a rule, we know the RBNZ is paying much closer attention to these data than it did over past cycles.
Nonetheless, NZ data remains inconsequential for NZD, with all eyes on Europe. We still believe the near-term balance of risks around the NZD/USD is skewed to the downside. Support at 0.7840/50 remains solid. A convincing break below this level would pave the way for a test of 0.7700.
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Majors
Heavy EUR selling was again the dominant theme in overnight trading. Sharp losses in EUR/USD dragged most of the major currencies lower, paving the way for a broad strengthening in the USD.
The EU Summit has failed to produce anything substantive to date. Markets may have to wait until Friday or the weekend for the official communiqué. There is always the potential for leaks though, so all eyes will remain on the newswires.
Last night’s dump in EUR suggests investors are increasingly positioned for disappointment. After squeezing up to almost 1.2520, the EUR/USD was rapidly knocked down 1.2420 on little news.
To be sure, European sentiment remained in the doldrums. Italian PPIs and German unemployment came in weaker than forecast, and Italy issued bonds at the highest yield since December.
It wasn’t long before general risk sentiment began to follow the EUR lower. Global equity markets notched up modest losses, the CRB commodity price index fell 1.2% (led by a 2.7% slide in oil prices), and ‘safe-haven’ bond yields have declined. Against this backdrop, the commodity-sensitive AUD, NZD and CAD all underperformed.
Investors are now eagerly awaiting the draft communiqué and press conference.
Overall, we suspect we’ll have to see decisive policy action (for example allowing the EFSF/ESM to buy sovereign bonds) to reverse the presently negative EUR sentiment. In the absence of such, a re-test of May’s 1.2360 lows looks likely.
Other news: A New York Times report suggested the JP Morgan trading loss could eventually reach US$9b. US jobless claims 386k as expected. The US Supreme court ruled the mandate at the centre of President Obama's healthcare overhaul is constitutional. Final Q1 UK GDP -0.3%q/q, as expected. German unemployment ticks up to 6.8% in June (unchanged at 6.7% expected). Italy tapped the bond market for the third time this week. €5.4b worth of 5- and 10-year government bonds were auctioned, at 5.84% and 6.19% respectively. Italian PPIs -0.3%m/m vs. +0.1% expected.
Event Calendar:
29 June: NZ building permits; JN jobless rate, CPI, industrial production; EU CPI; US personal spending; US Fed’s Bullard speaking; US Chicago PMI; 1 July: CH manufacturing PMI; 5 July: ECB.
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