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Global liquidity splurge a positive for both commodity prices and NZD

Global liquidity splurge a positive for both commodity prices and NZD

by Mike Jones


The NZD/USD spent most of last week trading choppily inside the familiar 0.7850-0.8000 range. It opens this morning towards the top end of this range.

Currency markets struggled a little for direction last week. Fears the global economy has run into a soft patch, and bouts of heavy EUR selling, provided stiff headwinds for investors’ risk appetite and the NZD at times.

However, easing action from global central banks (the Bank of Korea, Bank of Japan, and central Bank of Brazil all joined the easing brigade last week), helped limit the fallout. Investors are now hoping for more.

This global liquidity splurge certainly helps explain the recent bounce-back in global commodity prices – another NZD positive. The CRB index (an index of global commodity prices) is now almost 10% above its June lows.

With investor sentiment increasingly reliant on central bank easing, this week’s testimony from Fed chairman Bernanke will take on extra importance. After the disappointment from last week’s FOMC minutes, markets are hoping Bernanke will hint another bout of Fed quantitative easing is on the cards. A failure to do so would be consistent with a strengthening of the USD and a lower NZD/USD.

There’s another smattering of NZ data on offer this week. For the NZD, there’s probably two pieces that may provide some influence. First, the Q2 CPI report on Tuesday. This should be fairly subdued, with the market median expectation for a 0.5%q/q advance (1.1%y/y). We are a fraction higher, at 0.6% and 1.2% y/y. The tone of recent local data has been a touch disappointing and the interest rate market is again toying with the idea of

RBNZ rate cuts. Given this, a surprisingly strong CPI number would probably prompt the biggest NZD reaction on the day.Second, Wednesday morning’s dairy auction will be closely watched, following the disappointing price result of two weeks ago (-5.9%).

The USD is a little firmer relative to a fortnight ago, but soft commodity prices globally have been rising (wheat and corn in particular) as US drought conditions have taken hold. It will be interesting to see which one of these drivers wins out on the day.

In the short-term, we’ll be keeping a close eye on the 0.7860 level in NZD/USD. Not only has support opened up several times at this level, but it is also the pivot point at which momentum factors would switch from positive to neutral. As such, a break below this level would likely pave the way for a deeper NZD/USD correction towards 0.7600.


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Financial market sentiment ended last week on a high. Indicators of risk aversion eased, commodity prices rallied, and bond yields inched off their lows. Global equity markets notched up gains of 1-1.7%.

Consistent with the less risk averse backdrop, the ‘safe-haven’ USD and JPY underperformed on Friday as investors ventured back into the ‘pro-risk’ AUD and GBP.

On the face of it, the more upbeat sentiment was linked to Friday’s less dire Chinese data. Q2 GDP expanded 7.8%y/y, less than formal expectations of 7.9% but well above the whispers of 7.0% circulating earlier in the week.

Retail sales, industrial production, and investment data were all in line with market expectations of a modest slowing. All up, Chinese activity remains consistent with a soft landing. Additional policy easing looks likely, a positive for investors’ risk appetite.

Market positioning was likely also a factor in Friday’s ‘risk’ rally. Rumours of central bank EUR buying spooked the market into a bout of short covering. The EUR/USD was rapidly launched from 1.2160 to 1.2240, dragging most of the major currencies higher.

For this week, Fed chairman Bernanke’s testimony on Wednesday and Thursday will be the most important event for currency markets. Bernanke should provide markets with some idea of what it will take for the Fed to resume quantitative easing. Should Bernanke suggest a high hurdle for such, we should see the USD strengthen and ‘risk sensitive’ currencies to underperform.

On the other hand, if Bernanke is seen as edging closer to plumping for QE, the USD will be shunned and risk-sensitive assets will outperform. Expect currencies to remain rangy in the lead-up.
Given additional Fed action is still data dependent, this weeks slate of US data will also be worth watching. Retail sales, industrial production, and CPI will be highlights.

Other news: Eurogroup chief Juncker said the German court must decide on the constitutionality of the ESM by September.  CH IP 10.5%y/y (as expected), retail sales 13.7%y/y (13.4% expected), and investment 20.4% y/y (20.0% expected). US Michigan consumer confidence 72.0, against market expectations of 73.5.  US PPIs +0.1% vs. -0.4% expected.

Event Calendar:
16 July: NZ PSI; 17 July: NZ CPI; AU RBA Board minutes; EU German ZEW; UK CPI; US Empire manufacturing; US retail sales; 18 July; NZ dairy auction; CH property prices; UK BoE minutes; UK ILO unemployment; Bank of Canada decision; US CPI; US Bernanke delivers semi-annual testimony; US industrial production; 19 July: AU NAB business confidence; UK retail sales; US housing starts; US building permits, US Fed’s Beige Book; US Bernanke speaks again; 20 July: NZ migration; NZ credit card spending; AU terms of trade; UK public finances; EU German PPIs; US jobless claims; US Phillie Fed; US home sales;

All its research is available here.

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