by Mike Jones
NZD
After dribbling of its highs yesterday, the NZD/USD steadied around 0.8080 overnight.
With all the action and excitement due to take place late in the week, currency markets struggled for direction overnight. There was probably more attention on the Olympics.
The usual amount of European chatter and politicking took a little of the gloss off last week’s more optimistic sentiment.
US stocks slipped 0.2-0.5%, and oil prices declined 0.6% to US$89.60/barrel. But, despite the modest tempering of risk sentiment, the NZD/USD was steadied by another bout of NZD/EUR buying.
Indeed, the NZD/EUR climbed to fresh all-time highs above 0.6600, as the latest Eurozone economic confidence figures suggested the European recession is worsening (see Majors).
As we noted last week, there’s no doubt that positive NZ-EU relative growth and interest rate differentials are big cyclical tailwinds for the NZD/EUR.
But just how much higher can they take the cross? Our analysis suggests the ‘peak’ in NZD/EUR could be as high as 0.6800/0.6900. In other words, there is room for further mild appreciation in the NZD/EUR, but not a lot.
The bigger picture is that we are now close to the peak and we look for the cross to spend most of the rest of year in an elevated 0.6100- 0.6600 range.
Today’s NBBO business survey stands out as the highlight of a relatively sparse NZ 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 plumping for option b.
We look for the NZD/USD to remain fairly perky heading into the all important ECB and FOMC policy meetings later in the week. Momentum factors are positive, and Friday’s break through 0.8080 resistance was a bullish signal. NZD/USD support is eyed at 0.8035 on the day.
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Majors
It’s been a slow and sleepy start to the week in currency markets. Most of the major currencies simply shuffled about in familiar ranges overnight, on low volume.
Selling of the EUR/USD and EUR crosses was the most eye-catching theme of the night. The lower EUR had the effect of knocking many of the majors off their highs, and contributing to a modest strengthening of the USD.
On a quiet news night, a weaker Italian bond auction received a bit of attention. Italy sold €2.5b of 10-year and €2.2b of 5-year bonds at slightly lower yields relative to the previous auction. However, a drop in the bid-cover ratios (an indicator of demand) suggested investors are still cautious about the periphery.
As well as the Italian auction, a dismal set of Eurozone confidence figures also tempered demand for the EUR. The Business Climate Indicator, fell from -0.95 to -1.27 (-1.09 expected), leaving the indicator at its weakest level since October 2009. The fall in the broader economic confidence index (from 89.9 to 87.9) is consistent with a quarterly GDP contraction of around 1%.
From above 1.2300, the EUR/USD dribbled off to around 1.2240. EUR/JPY slipped from 96.50 to below 96.00. AUD/EUR climbed to a fresh all-time high and AUD/CAD hit a 30-year high.
Looking ahead, we suspect we’re in for more range trading today as investors await a packed schedule of event risk later in the week. The familiar 1.2200-1.2330 range should contain the EUR/USD. We still think the near-term risks around the EUR are skewed to the downside if the ECB doesn’t back up Draghi’s recent staunch rhetoric with action on Thursday.
Other news: Japanese industrial output falls unexpectedly in June (-0.1%m/m vs. +1.5% expected). Dallas Fed manufacturing index plunges to -13.2 in July from 5.8 in June (+2.0 expected).
Event Calendar: 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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