By Mike Jones
NZD
Doubts about the strength of the NZ economy saw the NZD/USD finish last week towards the bottom end of the familiar 0.8100-0.8230 range.
Optimism that central banks will be able to patch up the global economy with policy stimulus kept global asset markets frothy last week. Our global risk appetite index (long-run average of 50%) spent the week bubbling around 70%.
So the global backdrop remains highly supportive of the ‘risk-sensitive’ NZD. However, the NZD lost a little support from the domestic backdrop last week.
The Q2 HLFS labour market report was disappointing on all fronts. The unemployment rate increased to 6.8%, confounding expectations for a fall. Friday’s July spending figures were hardly inspiring either, falling 0.6%m/m.
Last week’s data disappointments may be enough to further delay the RBNZ rate hikes we expect. We are now assessing the case for shifting our rate hike call from March to June.
However, markets have already moved. Local swap rates fell last week as markets again moved to price a small chance of an RBNZ rate cut in coming months.
The associated reduction in the NZD’s yield advantage weighed on the NZD last week. NZ-US 3-year swap differentials dipped from 240bps to 225bps.
For some time, we’ve being toeing the line that the slow pace of NZ economic recovery argues for only a slow pace of NZD appreciation this year. That’s why we’ve maintained our year-end NZD/USD forecast of 0.8200 for a while now.
Looking ahead, we still think cyclical fundamentals are stacked in favour of NZD strength. But the lacklustre NZ recovery and a pushing back of RBNZ rate hike expectations suggest NZD/USD bounces will be limited to 0.8245 in the near-term.
The local data calendar is fairly full this week, albeit with no top-tier releases due. Tuesday’s Q2 retail trade report will likely capture the most attention. We expect a 0.7% bounce-back, following the mild dip of 0.6% in Q1. The other noteworthy event will be Thursday morning’s dairy price auction. We still think the balance of risks favour a push higher in prices in coming months.
Elsewhere, today’s food price data, Friday’s PPIs, and Thursday’s PMI and job ads figures will all likely be ignored. Short-term support for the NZD/USD is expected around 0.8065. Resistance is at 0.8170.
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Majors
The USD dribbled lower on Friday, as rumours of Chinese policy easing refreshed investors’ risk appetite.
More uninspiring Chinese data got the night off to a lacklustre start. A sharp slowing in Chinese exports (1.0%y/y vs. 8.0% expected) saw the July trade balance come in well below market expectations (US$25.2 vs. US$35b expected). Asian stocks and risk sensitive currencies like the AUD suffered in the wake of the figures.
However, it wasn’t long before rumours of imminent Chinese policy easing began to do the rounds (as yet unsubstantiated), helping shore up sentiment towards the global economy.
A bout of short covering saw the EUR/USD, GBP/USD, and AUD/USD recover all of their earlier losses. Indicative of investors’ optimism, the VIX index (a proxy for risk aversion based on S&P500 vols) fell below 15% on Friday – the lowest level since March.
Stepping back from the day-to-day volatility, currency markets spent most of last week in a holding pattern. A dearth of news and the London Olympics conspired to keep trading interest subdued. Most of the majors were confined to narrow ranges and currency volatility fell to multi-year lows. For example, AUD/USD 1-month vols traded below 12.5% for the first time since September 2008.
With the Olympics out of the way, it’s tempting to believe this week could be a little more exciting. However, the data calendar is fairly light. As a result, the chances for increased currency volatility likely rest with either a) unexpected European policy announcements or b) a big surprise from this week’s US data.
The US CPI, PPIs, retail sales, industrial production, housing starts, and the Empire and Philadelphia Fed manufacturing indices will be released this week. Across the Atlantic, preliminary Q2 GDP figures, and the UK Bank of England MPC minutes will be the highlights.
Other News: ECB member Coene said restarting the ECB’s SMP programme might be counterproductive and only should happen if strict conditions were applied. * The German Bundesbank will start managing some of its foreign currency reserves in Asia-Pacific financial markets as early as September.
Event Calendar: 13 August: NZ food price index; JP GDP (Q2); 14 August: NZ retail trade; AU NAB business confidence; UK RICS house prices; EU GDP; UK core CPI; EU German ZEW; US PPIs; US retail sales; 15 August: NZ card spending; AU consumer confidence; AU wage costs; UK BoE minutes; UK employment; US CPI; US empire manufacturing; US IP;16 August: NZ dairy auction; NZ BNZ PMI; US Fed’s Kocherlakota speaks; UK retail sales; EU CPI; US jobless claims; US housing starts; US Phillie Fed; 17 August: NZ PPIs; US Michigan consumer confidence.
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