By Mike Jones
NZD
After a brief spurt higher overnight, the NZD/USD has since given up most of these gains, to settle back inside the familiar 0.8020-0.8140 range.
For the most part, the NZD continues to trade at the whim of general risk appetite and sentiment in European debt markets.
Yesterday’s RBA Board minutes reinforced our expectation they won’t be cutting rates again. Australian growth is near trend and inflation close to target. More importantly, the RBA noted Chinese growth appears to be stabilising at a more “sustainable” pace.
The RBA also offered no obvious protest at the high AUD, effectively giving traders the green light to keep buying the currency. From 1.0450, the AUD/USD climbed back above 1.0500.
With yesterday’s NZ inflation expectations figures offering little to alter the RBNZ’s view of the world (the 2-year ahead measure ticked down to 2.3% from 2.4%), the NZD simply piggy-backed on the AUD’s strop higher.
A positive night in European debt and equity markets (see Majors) further juiced up the risk-sensitive NZD. Before long, the NZD/USD was riding high up around 0.8140.
However, the currency couldn’t hold onto these gains for long. After the initial enthusiasm, US stocks slipped back into the red, sapping demand for risk sensitive currencies like the NZD and AUD.
According to our momentum model, positive momentum in the NZD/USD and AUD/USD has faded.
The model is now neutral on the antipodeans. Combined with last night’s clear NZD/USD rejection of 0.8140, this further reinforces the idea the currency is stuck in a sideways 0.8020-0.8245 range for the meantime.
Looking ahead, there is some chance tomorrow morning’s FOMC minutes shake up currency markets a little (see Majors). Some chance that is, not a big chance.
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Majors
The USD weakened against most of the major currencies overnight, as gains in risk appetite dented demand for ‘safe-haven’ assets.
After a brief hiccup on Monday, risk sentiment is again riding high. Not only did chatter about additional Chinese policy stimulus help bolster sentiment, but ECB executive board member Asmussen (reportedly close to German chancellor Merkel) threw his support behind the ECB’s plan to lower bond yields in the European periphery.
European stocks notched up gains of 0.6-1.0%, commodities rallied, and US and German bond yields inched higher.
As the positive vibe continued into New York, the S&P500 managed to post a fresh 4-year high above 1425. However, US stocks have since backpedalled (the S&P500 is down 0.3%), tempering the positive mood somewhat.
After marching higher through the European session, most of the major currencies have eased off their highs, in tandem with equity market sentiment.
The exception is the EUR which has managed to hold most of its near ½ cent gain against the USD (currently trading around 1.2470). This is partly reflective of a still ‘short’ speculative market.
Looking ahead, attention now turns to tomorrow morning’s (6am NZT) FOMC minutes from the July meeting.
The debate over QEIII from the Fed continues to rage, as the overnight Lockhart comments suggest. However, we’re unlikely to get a firm steer from the minutes, with chairman Bernanke’s upcoming speech at the Jackson Hole symposium likely to provide more timely guidance on the Fed’s bias.
Indeed, investors may gloss over the likely cautious tone of the minutes, given the US data tone has improved noticeably since the July FOMC meeting.
Technically speaking, last night’s EUR/USD break above 1.2445 resistance suggests a push up towards 1.2600 is now on the cards. Solid support is expected at 1.2405.
Other News: Fed Lockhart (a moderate dove) said he was still undecided on the need for QEIII, and sees the Fed’s pledge to keep rates low until late 2014 as remaining appropriate. UK public borrowing figures come in a little better than expected (-£1.8b vs. -£3.2b expected). Chinese city Chongqing announced a three-year plan to revive the local industrial economy.
Event Calendar: 22 August: US existing home sales; US FOMC minutes; 23 August: CH HSBC Flash PMI; EU PMIs; US jobless claims; US new home sales; 24 August: NZ trade balance; AU RBA’s Stevens testifies; JN BOJ’s Shirakawa speaks; UK GDP; US durable goods orders.
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