by Mike Jones
NZD
The NZD/USD climbed to 2½ month highs above 0.8100 on Friday.
Risk appetite received a shot in the arm late last week from hints the ECB could soon take action to lower spiralling European borrowing costs.
As a result, equity markets, commodity-prices, and the ‘growth-sensitive’ NZD and AUD spent Thursday and Friday marching higher.
The actual data flow last week remained patchy, at best. Euro area manufacturing PMIs were dire.
UK GDP was shown to contract by a much larger than expected 0.7% in Q2. And Friday’s US GDP, while no worse than expected, was fairly lacklustre at 1.5% (annualised).
So, the risk rally looks to be on fairly shaky foundations. As such, it will need more policy stimulus to continue. That is where the world’s central banks come in.
Hopes are high that both the ECB and the FOMC will this week announce additional policy measures to shore up the global economy (see Majors for previews).
The extent that they do will dictate direction for the NZD this week. The more aggressive the stimulus, the more the NZD could rise.
Conversely, if investors end up disappointed, a potentially heavy toll could be taken on the currency.
For now, short-term indicators remain indicative of further NZD/USD strength. Momentum factors are positive, and Friday’s break through 0.8080 resistance was a bullish signal. A near-term test of 0.8200 is possible.
Tuesday’s NBBO business survey stands out as the feature of a relatively sparse New Zealand data week. Business confidence came off the boil in June.
July’s readings will be important to assess whether June’s pull back was a) another bout of Europe-induced nerves, b) a sign that firms are finally becoming realistic on NZ’s growth potential, or c) a start of a negative trend. We’re plumbing for option b.
Thursday’s GDT dairy price auction will also be interesting. We wouldn’t be surprised to see a bounce on drought-induced US supply concerns. US corn and wheat prices remain around multi-year highs.
For today, keep an eye out for this morning’s June residential building consents data (due 10:45am NZT). We’re looking for a firm bounce.
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Majors
Markets finished last week in an upbeat frame of mind. As a result, the ‘safe-haven’ USD and JPY continued to underperform on Friday.
Chatter and here-say about the nature of possible ECB support for European peripheral markets dominated the session. By the end of the night, investors were more or less convinced help was on the way.
Equity markets revelled in the more optimistic backdrop. European peripheral yields declined, commodity prices rose, and the ‘risk-sensitive’ AUD, NZD, and CAD strengthened at the expense of the USD and JPY.
Whether the improved market sentiment is sustained will depend on the actions of central banks this week. In particular, Thursday’s double act of the FOMC meeting (6:15am NZT) and ECB decision (11:45pm) will be critical.
Data that would normally whip markets into a frenzy of anticipation (US ISM manufacturing, US non-farm payrolls, and the Chinese PMI) will likely play second fiddle.
In short, investors want central banks to walk the talk. This particularly applies to the ECB. President Draghi’s declaration the ECB will do “whatever it takes” to preserve the Euro has solidified expectations it will restart its sovereign bond buying programme, in tandem with the EFSF.
So anything less would likely take a sharp toll on the EUR and ‘risk-sensitive’ assets. An ECB rate cut and/or a LTRO liquidity injection are not expected (at this stage).
For the FOMC meeting, a run of lacklustre data and dovish Fed speak has the market expecting ‘something’ from the Fed.
Options include extending forward guidance for rate hikes, cutting the interest rate the Fed pays of reserves, or full blown quantitative easing (QE).
If the Fed does nothing, investors will be disappointed and the USD will likely rally. At the other end of the spectrum, full-blown QEIII would likely weigh on the USD and provide a (temporary?) boost to investors’ risk appetite and the AUD and NZD.
Other news: US second quarter GDP growth increases 1.5% (in quarterly annualised terms), more or less in line with the 1.4% expected. The USD barely stirs.
Event Calendar:
30 July: NZ building permits; JN IP; Italy sells bonds; EU economic confidence; US Dallas Fed index; 31 July: NZ NBNZ business confidence; JN jobless rate; AU home sales; AU building permits; EU German unemployment; EU CPI; US PCE; US consumer confidence; 1 August: CH PMI; CH HSBC manufacturing PMI; EU & UK PMI manufacturing; US ADP employment; US ISM manufacturing; NZ dairy price auction; 2 August: US FOMC decision; NZ ANZ commodity prices; AU trade balance; AU retail sales; UK BoE meeting; EU ECB meeting; US factory orders; Monti & Rajoy meeting; 3 August: CH non-manufacturing PMI; EU retail sales; EU & UK PMI services; US non-farm payrolls.
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