by Kymberly Martin
NZD
Supported by a slight improvement in risk appetite the NZD/USD traded up to around 0.7890 this morning.
NZ’s trade data yesterday was actually a little better than expected but elicited little response from the NZD. The stronger driver of NZD direction came overnight as global fears appeared to take a breather (see Majors).
This saw some relief for ‘risk sensitive’ currencies such as the NZD and AUD. The NZD traded up from 0.7820 to trade around 0.7890 at present. This maintains the currency within its trading band of the past couple 6 weeks or so.
Near-term NZD/USD resistance is seen at the overnight highs around 0.7920. The local focus for the currency will be today’s RBNZ statement. We expect a fairly neutral statement. It is unlikely to do too much to challenge current market expectations for the OCR outlook.
The NZD/AUD fell yesterday afternoon after the AU CPI release. The data saw the market reduce expectations for a RBA rate cut at the next meeting (see Majors). The NZD/AUD fell from above 0.7670 to 0.7650, a level it has maintained since.
Against its European peers, the most notable NZD moves last night were against the GBP. After a dire UK GDP release the GBP came under selling pressure with the NZD/GBP a beneficiary. It traded up form 0.5050 to 0.5090 currently, reversing its slip in recent sessions.
Aside from this morning’s RBNZ meeting, the NZD will continue to be driven by sentiment toward the Eurozone.
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Majors
Markets were a little steadier overnight, resulting in some loss of demand for the USD, which has fallen against nearly all the major currencies.
A market exhausted from recent negative news and data flow, appeared to clutch at straws last night. It latched onto non-specific comments from ECB’s Nowotny about the potential for the ESM to be granted a banking license.
Equity markets made modest positive returns (Euro Stoxx, 0.35%). Our risk appetite index (scale 1-100%) moved up from 51-55%. US earnings results were mixed overnight.
The EUR was spurred higher by short covering, bouncing off 1.2050 to trade around 1.2160 at present. This was despite the delivery of German IFO data that came in a little below expectation (IFO expectation 95.6 vs.96.8 expected).
The biggest data surprise of the night however came from the UK. Q2 GDP contracted 0.7% versus an expectation of a 0.2% decline. It is feared the deepening recession may put the UK’s AAA credit rating in jeopardy (Moody’s put the UK on negative watch in February this year).
In addition, the weakness places additional pressure on the Bank of England to provide further policy easing. The GBP fell precipitously on the release, but actually managed to claw back much of its losses overnight. The GBP/USD currently trades around 1.5510, a similar level to yesterday morning.
AU CPI data yesterday came in not far from expectation (0.5% vs. 0.6% expected). Still, the market responded by reducing its pricing for rate cut expectations at the next RBA meeting.
There is now only a 34% chance of a 25bps cut priced for 7 Aug meeting. The AUD/USD showed some volatility before beginning on a gradual ascent overnight. It was also assisted by the less risk averse mood overnight. It currently trades around 1.0320.
The USD index declined as ‘safe haven’ demand was reduced overnight. The index bounced off support at 83.50 a couple of times overnight. It currently trades just above this level.
The market will be awaiting further European headlines tonight, and watching the latest Italian bond auction. The US releases durable goods and pending home sales.
Other news: NZ trade balance 12 month ytd, -747m vs. -1001m expected.
Event Calendar:
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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