By Mike Jones
NZD
The NZD outperformed overnight. The NZD/USD consolidated in a narrow 0.8250-0.8285 range, shrugging off the headwinds from a broad strengthening in the USD. Meanwhile, the NZD/EUR leapt almost ½ cent to 0.6340, having again encountered solid support at 0.6290.
NZ milk prices rose a further 2.4% at last night’s GDT auction. Prices have now surged 21% in around two months. This is line with our expectations.
With the US drought continuing to underpin grains prices at multi-year highs, we can expect further gains in dairy prices ahead. This provides an important buffer against the impact of the higher NZD on Fonterra’s payout forecast.
With the dairy price gains shoring up ‘fundamental’ support under the NZD, the kiwi was largely insulated from a further (mild) pairing in risk sentiment overnight (see Majors).
Indeed, the NZD notched up modest gains against all of the EUR, GBP, AUD, and JPY.
The NZD/USD is around ½ cent off its recent highs above 0.8300. Momentum is still positive according to our momentum model. But whether the currency can re-test the recent highs may well depend on what this weeks clutch of PMIs tell us about the health of the global manufacturing sector.
Clear signs of a bottoming would likely refresh investors’ risk appetite and set the NZD/USD on a path higher again.
This week’s important domestic data will also help shape NZD sentiment. Today it’s the Q2 balance of payments figures, tomorrow it’s Q2 GDP.
For today’s numbers, we’re expecting a marked widening in the annual current account deficit, to 5.4% of GDP from 4.8% in Q1 (the market is at 5.2%). It could be even larger, given the revisions indicated by Statistics NZ for this release.
On the day, NZD/USD bounces are expected to be limited to 0.8300. Support around 0.8235 could be tested if the current account deficit figures prove about as nasty as we expect.
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Majors
The hangover from last week’s stimulus party continued overnight. Global equity markets are a sea of red, and commodity prices are lower again. The USD unwound a little more of last week’s losses as the more cautious tone underpinned demand for ‘safe-haven’ assets.
There hasn’t been much in the way of new news this week. So part of what we are seeing is likely just profit taking after last week’s Fed-inspired risk rally. Still, concerns about Spain are creeping back to the fore.
Indeed, Spanish 10-year yields moved back above 6% overnight, up almost 50bps from last week’s low. This largely reflects worries about the Spanish government’s reluctance to apply for a bailout.
Not only did these Spanish jitters undermine the EUR overnight, but Germany displayed more signs of economic spluttering. The headline economic sentiment index from the German ZEW survey rose a little more than expected in September (-18.2 vs. -20.0 expected).
But the current conditions index, which we believe is a better indicator of GDP, fell more sharply than expected (12.6 vs. 18.0 expected). It’s yet another indicator suggesting the German economy ground to a halt during Q3.
From around 1.3120, the EUR/USD fell steadily through the evening, to around 1.3030 currently. In the short-term, further declines look likely, ahead of support at 1.2990.
Outside of the EUR, the fallout was relatively limited, although the AUD continues to suffer from a toxic mix of sliding commodity prices (the CRB index fell a further 1.4% overnight to be down 3% from Friday) and building speculation of an October RBA rate cut.
We didn’t think there was a smoking gun in yesterday’s RBA minutes to suggest an October cut is likely (we’re still calling no change). However, the market now prices a 65% chance of such.
Looking ahead, the big news of this week looks set to be Thursday’s slew of manufacturing reports. No doubt these will be perused for signs of bottoming in the global manufacturing sector.
For today, the Bank of Japan’s policy meeting will be most closely watched. As we noted yesterday, the JPY has softened recently amid mounting speculation the Bank of Japan could take action to lower the JPY and rescue the economy.
Pressure on the BoJ is certainly mounting. However, we suspect only a ‘shock and awe’ type increase in the BoJ’s asset purchase programme would be successful in driving the JPY sustainably lower.
Other News:
*UK consumer prices rose by 0.5% in August, helped by higher petrol prices. This was in line with expectations and enough to push the annual rate down to 2.5%.
* The US NAHB housing market index bounced to its highest level since June 2006, the 5th straight month of improvement.
* Fed dove Evans says fears of Fed-fuelled inflation have been "consistently wrong." In contrast, Fed hawk Fisher (a non-voter) told CNBC he would have voted against QE3.
Event Calendar:
19 September: NZ dairy auction; NZ currency account; JN BoJ decision; UK BoE releases minutes; US housing starts; US building permits; 20 September: NZ GDP; CH HSBC Flash manufacturing PMI; EU European PMIs; UK retail sales; US jobless claims; US Philadelphia Fed index; US more Fed speak; 21 September: NZ net migration; NZ credit card billings.
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