by Mike Jones
NZD
Following Friday night’s march higher, the NZD has started the week in consolidation mode. The NZD/USD spent the night chopping about in a tight 0.7940-0.7990 range.
Investors were left scratching their heads over the USD outlook last night. This partly explains the rangy nature of the NZD/USD. On the one hand, weak US retail sales figures, and chatter about additional easing from the Fed argued for a lower USD.
But, on the other, the IMF’s lowering of its global growth forecasts and rising European sovereign spreads acted to suppress risk appetite and bolster ‘safe-haven’ demand. For now, the USD bears are in the ascendancy, but we’ll likely get a firmer guide on USD direction from Fed chairman Bernanke tonight.
It’s worth noting, our corporate client base switched to being net buyers of the currency last week.
According to our currency flow model, BNZ’s client flows for all NZD pairs were in the 57th percentile, with solid net buying of NZD/AUD, NZD/GBP, and NZD/JPY. This represents a stark turnaround from recent weeks in which net selling has been the norm.
Sentiment towards the USD is the key driver of NZD/USD at present. However, today’s CPI figures could spur some near-term volatility. These should be fairly subdued.
The market median expectation of a 0.5%q/q advance would leave annual inflation at just 1.1%y/y. We are a fraction stronger, at 0.6%q/q 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.
As we noted yesterday, the NZD/USD remains range-bound for now, but we’re keeping a close eye on the 0.7860 level. Not only has this proved to be an important support level of late, but it is also the pivot point at which momentum factors would switch from positive to neutral.
As such, a convincing break below here would likely pave the way for a deeper NZD/USD correction towards 0.7600. Resistance at 0.8080 should cap the near-term topside.
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Majors
A broad weakening in the USD has been the most eye-catching theme from the overnight trading session. Most of the major currencies have notched up small gains as a result.
After starting the night on the front foot, the USD staged a sharp reversal following the release of more uninspiring US data. US retail sales for June recorded a shock 0.5%m/m fall, against expectations of a 0.2% increase.
For a market already giddy on stimulus hopes, the data were seen as boosting the hopes of additional Fed easing. Indeed, the negative USD reaction may have been exaggerated by the proximity of Bernanke’s testimony on Tuesday/Wednesday.
Longer-dated US Treasury yields were shunted lower in the wake of the numbers, in many cases to record lows. Flagging yield support took a toll on the USD, particularly against fellow ‘funding’ (low interest rate) currencies like the JPY and EUR. USD/JPY skidded from 79.20 to around 78.80, while EUR/USD climbed almost a cent to 1.2280.
While commodity markets got a boost from the weaker USD, stock markets have continued to struggle as growth concerns percolate. A fairly dreary World Economic Outlook from the IMF certainly did nothing for the mood. The IMF shaded down its 2012 global growth forecast to 3.5% (from 3.6% in April). 2013 growth was revised from 4.1% to 3.9%. Bear in mind that these numbers are fairly close to trend growth over the past 30 years of 3.5%.
Looking ahead, we wouldn’t be surprised to see the USD remain heavy in the lead-up to Bernanke’s testimony. This is particularly so given the speculative community may look to offload some of its large net short EUR position ahead of the event. Given this, the downside on EUR/USD should be limited to 1.2150 in the near-term.
Other news: US Empire (New York) manufacturing index increases by more than expected (7.39 vs. 4.00 expected), but not enough to offset the gloom from the weaker retail figures. German Constitutional Court announces it won’t rule on the ESM fiscal pact until September.
Event Calendar:
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.
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