By Kymberly Martin
NZD
As risk appetite came under pressure late on Friday night the NZD/USD gave up its earlier gains, closing the week at 0.8300.
Risk appetite softened a little at the end of the week, on the back of simmering Spanish concerns, and weaker-than-expected US data (see Majors). This saw the NZD/USD slide into the close from Friday night highs around 0.8350.
Squinting through the ups and downs of the past couple of weeks the NZD/USD appears to be establishing itself in a trading range between 0.8190 and 0.8360.
There is little on the domestic front this week to test this range. Tomorrow’s ANZ commodity price index may garner some attention, as will Wednesday morning’s international dairy price auctions.
Some rebound in dairy prices may be in the offing, especially given evidence of waning US dairy production. Still, the greater driver of the NZD this week is likely to be broad global risk appetite.
Given our risk appetite index (scale 0-100%) is still at a hearty 72%, we are aware there is plenty on the global data front this week to test this optimism (see Majors). In turn this may test the NZD.
The NZD/AUD continued its steady ascent on Friday, breaking above early April highs. The cross now sits at the highest level since September, at 0.8000.This Tuesday’s RBA meeting will be crucial for the cross.
The market currently prices a 66% chance of a 25bps cut. It will be a close call, but our NAB colleagues expect no change in policy rate at this meeting. As such, the risk is for a slump in the NZD/AUD if the RBA does not cut.
We would however use this as an opportunity to re-enter long NZD/AUD positions. Medium-term we continue to see interest rate differentials moving to support the NZD/AUD. We maintain an end of year NZD/AUD target of 0.8200.
Today, it is a public holiday in NSW, Australia. There are no NZ data releases.
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Majors
The ‘safe haven’ USD was back in favour on Friday night, strengthening against all its major peers. The USD index closed the week above 79.90.
On Friday evening, equity markets were weak (Euro Stoxx 50 down 2.1%, S&P500 -0.45%). The market was anticipating the Spanish bank’s ‘stress test’ results. The Bank of Spain later reported the banking system needs €59.3 of additional capital to cover losses from investment in real estate.
Spain plans to borrow €207b next year taking its debt/GDP to 90%. Data also showed Eurozone CPI slightly higher than expected for September (2.7%y/y vs. 2.4%).
Within this reading Spanish CPI came in at 3.5%y/y (2.8% expected). Higher inflation is hardly a welcome supplement to Spain’s low growth environment.
However, it was the release of weaker-than-expected US data early Saturday morning that seemed to spur currency markets into action. The Chicago PMI slipped into contraction (49.7 vs. 52.8 expected) for the first time since late 2009.
University of Michigan consumer confidence was also lower than expected (78.3 vs. 79.0). Benefiting from ‘safe haven’ flows, the USD moved higher while the EUR/USD slumped from 1.2940 to 1.2860.
The ‘risk sensitive’ AUD and NZD were also softer in the early hours of Saturday morning. The AUD/USD fell from 1.0460 to around 1.0380. The release of the HSBC China PMI over the weekend showed manufacturing contracted for the 11th straight month.
The Chinese ‘official’ version will be released today. This may result in some further downward pressure on the AUD. Key AU states have public holidays today.
Tonight, manufacturing will remain centre stage with PMI releases in Europe, UK and the US. The Eurozone will also release its unemployment rate which is expected to remain at an elevated level around 11.4%.
This week will also bring little shortage of European headlines, particularly focused on Spain.
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