by Mike Jones
NZD
After spending most of the past 24 hours consolidating above 0.7900, the NZD/USD has skidded lower this morning to test support at 0.7850.
Yesterday’s HSBC Flash PMI estimate suggested Chinese policy easing is starting to filter through to stronger economic activity. The headline index picked up to 49.5 in July, from 48.2 the previous month. If this gain is sustained, the PMI is indicative of a bottoming in Chinese industrial production.
Of course, this is good news for Australia and NZ. Consistent with this idea, the NZD/USD and AUD/USD began to head higher in the wake of the data. Later in the afternoon, RBA Governor Stevens did his best to play up the positives in the Australian economy, adding to the firmer tone in the antipodean currencies.
However, it was a different story overnight. A fresh wave of fear spread across European markets, spurring big falls in equity and commodity markets, and undermining investors’ risk appetite.
Carry trades in the NZD and AUD were liquidated in favour of ‘safe-haven positions in the USD and JPY. The aftermath has seen the NZD/USD finish the night ¾ cent lower around 0.7850.
We are looking for a $118m surplus from today’s NZ merchandise trade figures (due 10:45am NZT). Such a result would still see the annual deficit worsen to $888m with exports down an annual 4% and imports 2% lower, y/y. This would imply further worsening in New Zealand’s current account deficit.
However, in the absence of a huge surprise, investors are likely to gloss over the trade data in favour of the Australian CPI figures due out this afternoon (1:30pm). The consensus expects a 0.6% quarterly increase (1.3%y/y) in the both the headline CPI and core measures.
Given bearish global sentiment and the 110bps of RBA easing priced in, a stronger than expected CPI would likely elicit the biggest reaction from the AUD/USD and NZD/USD. A stronger number could also prove to be the catalyst for a test of key NZD/AUD support at 0.7660.
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Majors
It’s been another night of fear and loathing in financial markets. The USD and JPY remain in vogue as risk aversion and flight to safety flows continue to hold sway.
After a steady start to the night, investors’ risk appetite began to head south following the release of a terrible set of European manufacturing PMIs. The composite EU index stumbled deeper into contractionary territory. The 44.1 reading was consistent with a three year low and well below expectations of 45.2.
Meanwhile, chatter about a Grexit and the likelihood of Spain requesting an official sovereign bailout reached fevered pitch. Italian and Spanish equities plunged. And, despite a well received Spanish bill auction, Italian and Spanish 10-year bond spreads (over German bunds) soared to new highs above 535bps and 635bps respectively.
Uninspiring US economic news only added to the negative sentiment. The Richmond Fed index fell to a level described as “disastrous” by PIMCO’s Gross (-17 vs. -1 expected) and corporate earnings reports mostly undershot expectations.
Globally, equity markets are under pressure (the S&P500 is currently down 1.3%), commodity prices are falling (the CRB index is off 0.8%), and risk aversion gauges rising.
The VIX index (the so-called ‘fear’ gauge) increased from 18.5% to around 20.5%. Against this backdrop, ‘safe-haven’ currencies like the USD and JPY are outperforming, with the EUR and European currencies taking most of the pain.
The EUR/USD has skidded to another 2-year low around 1.2050. EUR/GBP has sold off again to levels we’d regard as attractive to buyers (0.7780).
Looking ahead, it’s difficult to pinpoint a possible circuit breaker to the current bout of risk aversion and global growth worries. Indeed, tonight’s key data release – Q2 UK GDP – is likely to be weak.
We’re expecting a below consensus flat outturn. As a result, we suspect the USD will remain firm in the near-term. Solid support on the DXY index is eyed on any dips towards 83.50.
Other news: US Markit manufacturing PMI fell to 51.8 vs. 52.0 expected – the lowest since December. Ratings agency Moody’s changes its ratings outlook on Germany, the Netherlands and Luxembourg to negative, citing an increased risk of EU break up.
Event Calendar:
25 July: NZ trade balance; AU CPI; EU German IFO; UK Q2 GDP; US new home sales; 26 July: NZ RBNZ OCR review; NZ finance minister speaking; US durable goods orders; US jobless claims; US pending home sales; 27 July: EU German CPI; US Q2 GDP; US Michigan consumer confidence.
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